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Professional's Corner
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MURPHY’S LAWS ON CLIENTS TO AVOID Presented by Thomas J. Murphy Murphy Law Firm, Inc. P O Box 51244 Ahwatukee Station Phoenix, AZ 85076 480-838-4838 www.murphylawaz.comPresented To the Tax Law section of the State Bar of Arizona March 28, 2007
Some of the best decisions that an attorney – or any business person for that matter – can make is to simply say "no". This is particularly important when deciding whether to accept the engagement of a new client. Having a bad client can demoralize an attorney and staff faster than anything I know. I base this on my (unfortunately) extensive experience on this topic. I have listed below ten client-types who should be avoided. But there is one overriding concept that should always be kept in mind: would I treat the client they way the client is treating me? If the answer to that is no, then get rid of the client. Period. Difficult clients seldom get better and they take a significant toll on your staff. End the engagement as soon as you can. With this in mind, here are my "Top 10" clients to avoid, in no particular order. #1. The price-obsessed client. Our clients should be price-conscious but not price-obsessed. The primary concern of this client is the cost of our services and not issues such as quality of the work, experience in this area of law, timeliness of the delivery of services and so on. This client does not appreciate the knowledge and experience that sets practitioners apart and hence is very unlikely to pay for that expertise. This client is also likely to become a problem client, based on the following principle: Murphy’s First Law of Client Representation: The client who pays the least demands the most. One very effective tool to avoid this situation is to charge a consultation fee for the first meeting. Someone who is willing to pay several hundred dollars to meet with you is serious about resolving their problem and not simply shopping around for the cheapest fee. They realize your representation of them will likely not be inexpensive. It will dramatically decrease they number of clients who don’t retain you or will "get back to you". As one colleague of mine has pointed out: "What’s the worst thing they can say about me if they won’t pay the consultation fee? That I am too expensive. I can live with that." Also realize that, in a highly technical area such as estate planning or tax law, the prospective client really has no way of distinguishing who is good and who is not. As crazy as it sounds, many clients at the outset will judge your ability and expertise by the size of your fee – the higher the fee, the better you must be. #2. The "I don’t care what it costs" client. This client is at the other end of the spectrum. This client is very angry and worked up over the matter. He is either being accused of some wrongdoing, like taking undue advantage of a parent, or he is the one making the accusation. Or he may be furious at some injustice that the IRS is attempting to impose upon him. Either way, he is "taking it all the way". He doesn’t care what it will cost. But there is a reason why he doesn’t care what it will cost. Because he isn’t going to pay you. This client is usually out for revenge, which the slow-moving and expensive court system does not do very well. As a result, this client will never be happy, especially when he gets your first bill. #3. The last-minute client. This is the new client who calls you on Monday morning demanding an immediate appointment because he has a hearing on Wednesday morning. You squeeze him in at the end of the day. The client clearly needs representation. The two of you reach an agreement for you to appear on Wednesday morning, at which time the client will pay you a retainer of, say, $2,500. You agree to meet at 9:00am at the courthouse for the 10:00am hearing. Wednesday morning, you arrive at the courthouse and the client, along with several friends and family members, are already there. A good sign. You further discuss the case where you learn of more merits about the case. An even better sign. At around 9:30am, you ask about the $2,500 retainer. The client doesn’t have it. The client doesn’t even have half of $2,500. He has something like $900.00. You look at the check with your name on it. You look at your watch – the hearing is in thirty minutes. You have already driven out to the courthouse. The client seems like a decent fellow with a meritorious case. He tells you he will have the balance to you within a couple weeks – he has an income tax refund coming. You think there is a chance the case might be quickly resolved. You decide to take the case, accept the check (or, more likely, a money order) and make your appearance in court. Big mistake. You will probably never see any further funds from this client. This client knows he doesn’t have the money to pay you but he hopes that, by having you appear in court for the other parties to see, that a quick resolution will follow. This means you won’t need or use the full retainer. But don’t count on this happening. In such situations, remember the following concept: Murphy’s Second Law of Client Representation: If they can’t pay you when they need you, they won’t pay you when they can. Or, as Jay Foonberg states in his great book, How To Start And Build A Law Practice: There is nothing more worthless than the value of legal services already provided. When representation in court is required, remember this concept as well if things don’t go well and you want to terminate the representation: Murphy’s Third Law of Client Representation: Representing a client in court is like placing your hand inside an animal trap. It is very easy to put it in but it can be very painful to get it out. Terminating representation in court will require the filing of a pleading stating your withdrawal from the case. This will normally require the signature of your so-to-be ex-client, which may not be easy to obtain. You may have to obtain a court order permitting your withdrawal. Or, in certain situations such as when a trial date has been set, the court may not allow your withdrawal, even if you have not been paid. #4. The client with a difficult family history. This is another situation where revenge plays a large part, making resolution of the case immensely difficult. This usually occurs in probate administration. Many times, it will not be your clients fault since another family member may be the difficult one. Murphy’s Fourth Law of Client Representation (also known as Murphy’s Law of One): There is always one. In any large family, there’s always one family member ready to cause trouble. There is always one family member who has a score to settle. In any probate matter or other family legal situation such as a multi-generational family business, it only takes one disruptive family member to slow everything down to a crawl. Many times, these disputes are ridiculously petty, leading to the following concept: Murphy’s Fifth Law of Client Representation (also known as Murphy’s Law of Inverse Proportion): The biggest battles are fought over the smallest things. Who gets the china when Mom dies? Should the estate pay for the daughter’s airfare to attend the funeral? Who will move into Dad’s vacated office? Be wary of children – or worse, the children’s spouses – who take an active interest in what you are doing for the parent. These children and in-laws don’t have the fortitude to confront their parent if they do not agree with what the parent is doing but they will not hesitate to complain when the parent is no longer around. Or they may not be willing to say anything to you but will pressure the parent when they are outside of your office. Many times, that child is consulting with someone else, unknown to you. Often, that "someone" has no idea what they are talking about – often wrong but never in doubt -- but they have the child convinced that they do. If the child is getting bad advice from some knucklehead, you as practitioner have a problem that, if not obvious, is festering. And other children may resent the involvement of that child, and especially the involvement of an in-law, in the parent’s affairs, even if that child has the best of intentions. An additional consideration is that, when these family battles flare up and issues cannot be resolved, the judges will often blame the lawyers for the mess.
#5. The "simple" client This is the client who is adamant that they have a very simple legal issue that will entail little time – or fees – on the part of the lawyer. Don’t believe it. If the matter was so simple, the client would not be visiting you in the first place. Murphy’s Sixth Law of Client Representation: A client who tells you she has a "simple" problem is actually another way of saying "I don’t want to pay you for the mess I’m in". #6. The cash client. Cash usually means trouble. A person who does not have a checking account or credit card is highly unlikely to be a good, reputable client or one who can afford your services. Or, they may be trying to hide something by paying you in cash. Either way, cash is not a good sign. To avoid a dispute later on as to how much was paid, insist on providing a signed, dated receipt and have one of your staff count the cash in addition to you. #7. The slow-paying client If your client is happy with your services, then you should be getting paid promptly. Failure to do so usually means two things, neither of them good. One is that they do not have the funds to pay you and cannot afford your services. This is especially so if they cannot put the amount owed on their credit card. Or, they may be unhappy with your performance. Either way, get the problem straightened out ASAP. You are not being unreasonable in asking for prompt payment. Look at it from the other end with you having to pay the bill – wouldn’t you immediately pay the bill, figuring that the service provider expects to get paid? Murphy’s Seventh Law of Client Representation: Do not let a client’s bill grow to a point where you can’t afford to walk away from it. As Jay Foonberg warns: "It is better to not do the work and not get paid than to do the work and not get paid". #8. The litigious client. Be wary of clients who have sued or been sued many times. These are people who try to game the system and use the legal system as an obstacle towards others. They tend to have a scapegoat mentality – it is always someone else’s fault. Many times they are trying to get out of paying someone – recognize that you may be the next person they are trying to stiff. Most reasonable people resolve their differences without going to court. These clients will not hesitate to compare you with the prior lawyers they have worked with. You seem to be charging much more than the previous lawyer. The previous lawyer told them something different or that it would not be a problem. And so on. These clients can be very manipulative. Murphy’s Eighth Law of Client Representation: Be wary of clients who have more litigation experience than you do.
#9. The chronic rescheduler It is not unreasonable to a client to have to reschedule an appointment. But when it becomes a recurring situation, you need to think twice about continuing the representation, if, indeed, it has even started. There are three reasons for this. One is that this can create havoc with your schedule, especially during busy times. The second and more important reason is that, by repeatedly rescheduling, this person is indicating that their matter with you is not very important. Third, this person is likely to be very disorganized and/or is living at a very frenetic, world-wind pace. And they often have trouble making decisions. #10. The client with a dysfunctional family. This is similar to problem client #4. Here, the client may have a long, established relationship with you. He thinks you are the best lawyer around. But will the client’s children think so after the client had died? Maybe you recommended a tax strategy that backfired or did not work out quite as favorably as you had hoped. Maybe you represented the client on a very complex matter that the children now think could have been handled much more simply, inexpensively and expeditiously. Maybe you developed a business succession plan where one of the children feel shorted. Or you crafted an estate plan that either resulted in unequal bequests among the children or involves a second spouse. Or it may simply be a matter of sticker shock – Dad paid you how much? Once your client has died, the children, the spouse and other beneficiaries have standing to ask some very pointed questions about your representation. This could lead the court action to recoup some or all of the fees paid to you or to undo some of the work done for the client, such as challenging the will or trust that you prepared for the now-deceased client. This is a difficult situation for practitioners to protect themselves. Not only can it be difficult to predict what the objections might be, but the practitioner may have derivative duties to the children by virtue of the representation of the client. See, for instance, Estate of Fogelman, 197 Ariz 252 (CA1, 2000); Wetherill v. Basham, 197 Ariz 198 (CA2, 2000); Fleming v. Capitol Indemnity, 203 Ariz 589 (CA2, 2002). As a result, consideration should be given to declining the engagement. At the very least, the fee agreement should address what will happen and how you will get paid if the children or spouse later take aim at you. Also realize that the dysfunction in the family is usually not limited to only one family member. Erratic or manipulative behavior, bad tempers and the like often run in the family and are usually not limited to that one bad child. There is usually more than one jerk in the family. Make sure you are ready and equipped to deal with this. |
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THE NEW ARIZONA TRUST CODE ARS 14-10101 et seq. By Thomas J. Murphy Murphy Law Firm, Inc. P O Box 51244 Ahwatukee Station Phoenix, AZ 85076 480-838-4838 www.murphylawaz.comPresented to the College of Estate Planning Attorneys October 2, 2008
Effective January 1, 2009 and after several false starts, a new, all-encompassing trust code takes effect in Arizona. It is based on the controversial Uniform Trust Code. The new Code is contained in Chapter 247 of the laws passed in the 2008 legislative session that will create a new Chapter 11 to Title 14. It can be reviewed in its entirety at the Arizona legislature’s website, www.azleg.gov. (Go to the "Bills" tab, click on "Session Laws" on the drop-down menu and proceed to Chapter 247.)The UTC has been enacted in 21 jurisdictions (Kansas, Nebraska, Wyoming, New Mexico, District of Columbia, Utah, Maine, Tennessee, New Hampshire, Missouri, Arkansas, Virginia, South Carolina, Oregon, North Carolina, Alabama, Florida, Ohio, Pennsylvania, North Dakota and Arizona). Taken in the order in which they appear, here are the important provisions that materially change or expand the law of trusts in Arizona: Applicable dates Section 18 of Chapter 247 provides the applicable dates. It applies to all trust created on or after January 1, 2009 and to all judicial proceedings commenced on or after January 1, 2009. As for any proceeding commenced before January 1, 2009, the Code will apply unless it would "substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties". Any "rule of construction or presumption applied to all pre-January 2009 trusts "unless there is a clear indication of a contrary intent". 14-10105(b) – default rules One of the most controversial aspects of the Code since the provisions below are mandatory and cannot be drafted around. They are: 1. THE REQUIREMENTS FOR CREATING A TRUST. 2. THE DUTY OF A TRUSTEE TO ACT IN GOOD FAITH AND IN ACCORDANCE WITH THE PURPOSES OF THE TRUST. 3. THE REQUIREMENT THAT A TRUST AND ITS TERMS BE FOR THE BENEFIT OF ITS BENEFICIARIES AND THAT THE TRUST HAVE A PURPOSE THAT IS LAWFUL, NOT CONTRARY TO PUBLIC POLICY AND POSSIBLE TO ACHIEVE. 4. THE POWER OF THE COURT TO MODIFY OR TERMINATE A TRUST UNDER SECTIONS 14-10410, 14-10411, 14-10412, 14-10413, 14-10414, 14-10415 AND 14-10416. 5. THE EFFECT OF A SPENDTHRIFT PROVISION AND THE RIGHTS OF CERTAIN CREDITORS AND ASSIGNEES TO REACH A TRUST AS PROVIDED IN ARTICLE 5 OF THIS CHAPTER. 6. THE POWER OF THE COURT UNDER SECTION 14-10702 TO REQUIRE, DISPENSE WITH, MODIFY OR TERMINATE A BOND. 7. THE POWER OF THE COURT UNDER SECTION 14-10708, SUBSECTION B TO ADJUST A TRUSTEE'S COMPENSATION SPECIFIED IN THE TERMS OF THE TRUST THAT IS UNREASONABLY LOW OR HIGH. 8. THE DUTY TO RESPOND TO THE REQUEST OF A QUALIFIED BENEFICIARY OF AN IRREVOCABLE TRUST FOR TRUSTEE'S REPORTS AND OTHER INFORMATION REASONABLY RELATED TO THE ADMINISTRATION OF A TRUST. 9. THE EFFECT OF AN EXCULPATORY TERM UNDER SECTION 14-11008. 10. THE RIGHTS UNDER SECTIONS 14-11010, 14-11011, 14-11012 AND 14-11013 OF A PERSON OTHER THAN A TRUSTEE OR BENEFICIARY. 11. PERIODS OF LIMITATION FOR COMMENCING A JUDICIAL PROCEEDING. 12. THE POWER OF THE COURT TO TAKE ACTION AND EXERCISE JURISDICTION AS MAY BE NECESSARY IN THE INTERESTS OF JUSTICE. 13. THE SUBJECT MATTER JURISDICTION OF THE COURT AND VENUE FOR COMMENCING A PROCEEDING AS PROVIDED IN SECTIONS 14-10203 AND 14-10204. 14. THE NOTICE PROVISIONS OF SECTION 14-10110, SUBSECTION B. 14-10106 – Restatement Second "THE COURT SHALL LOOK TO THE RESTATEMENT (SECOND) OF TRUSTS FOR INTERPRETATION OF THE COMMON LAW AND NOT TO SUBSEQUENT RESTATEMENTS OF TRUSTS." 14-10107 – Choice of jurisdiction The trust can specify which state’s laws will apply. If no designation, validity of trust is determined using law of the jurisdiction where the trust was executed. Law of principle place of trust administration will govern as to administration. Sec. 10108 states place of administration will be trustee’s place of business 14-10109 & -10301 – Notice Any "PROPERLY DIRECTED ELECTRONIC MESSAGE" will suffice. Virtual representation as set forth under the new 14-1407 will apply to all trusts governed by the Code. This means that anyone with "a substantially identical interest " may represent an incapacitated or unborn person or a person who cannot be located as long there is "no material conflict of interest". For a charitable trust, section 10110(b) requires that the Attorney General must be given notice within sixty days after creation of the trust, which will occur when the trust becomes irrevocable. It is not entirely clear how beneficiaries of testamentary trusts are treated for notice purposes. It appears that notice will not be required until the settlor’s death because 14-10401(a)(1) states that a trust is created "by will or other disposition taking effect on the settlor’s death". 14-10111 – Nonjudicial settlements Any interest parties can enter into a non-judicial settlement as long as it does not violate a material purpose of the trust. "MATTERS THAT MAY BE RESOLVED BY A NONJUDICIAL SETTLEMENT AGREEMENT INCLUDE: 1. THE INTERPRETATION OR CONSTRUCTION OF THE TERMS OF THE TRUST. 2. THE APPROVAL OF A TRUSTEE'S REPORT OR ACCOUNTING. 3. DIRECTION TO A TRUSTEE TO REFRAIN FROM PERFORMING A PARTICULAR ACT OR THE GRANT TO A TRUSTEE OF ANY NECESSARY OR DESIRABLE POWER. 4. THE RESIGNATION OR APPOINTMENT OF A TRUSTEE AND THE DETERMINATION OF A TRUSTEE'S COMPENSATION. 5. THE TRANSFER OF A TRUST'S PRINCIPAL PLACE OF ADMINISTRATION. 6. THE LIABILITY OF A TRUSTEE FOR AN ACTION RELATING TO THE TRUST" 14-10205 – ADR Trust agreement can provide for mandatory alternative dispute resolution 14-10407 – oral trusts "THE CREATION OF AN ORAL TRUST SHALL BE ESTABLISHED ONLY BY CLEAR AND CONVINCING EVIDENCE AND ITS TERMS SHALL BE ESTABLISHED BY A PREPONDERANCE OF THE EVIDENCE." This can be expected to arise in instances of jointly titled property where it is not entirely clear why the surviving tenant was placed on the title. A typical example is a child who was added to the title of a parent’s bank account or residence and it is unclear whether the child was simply added for convenience purposes while the parent was alive. 14-10408 – pet trusts Pet trusts are permitted for any animal alive during the life of settlor (rather than alive at time of creation of trust). 14-10411 -- modification or termination by consent All beneficiaries can agree to terminate or modify a trust as long as it is "not inconsistent" with a material purpose of the trust. (So, when drafting a trust, the settlor should state what is material.) Beneficiaries can also agree on distribution upon termination. If no unanimous agreement, the court approval must be obtained as long as "THE INTERESTS OF A BENEFICIARY WHO DOES NOT CONSENT WILL BE ADEQUATELY PROTECTED". 14-10412 -- modification or termination due to unforeseen circumstances A court (rather than beneficiaries) may modify or terminate if "MADE IN ACCORDANCE WITH THE SETTLOR'S PROBABLE INTENTION" or "IF CONTINUATION OF THE TRUST ON ITS EXISTING TERMS WOULD BE IMPRACTICABLE OR WASTEFUL OR WOULD IMPAIR THE TRUST'S ADMINISTRATION". 14-10414 – uneconomic trust A court or trustee can terminate a trust if the trust corpus is less than $100,000 or "IS INSUFFICIENT TO JUSTIFY THE COST OF ADMINISTRATION." 14-10415/6 – reformation "THE COURT MAY REFORM THE TERMS OF A TRUST, EVEN IF UNAMBIGUOUS, TO CONFORM THE TERMS TO THE SETTLOR'S INTENTION IF IT IS PROVED BY CLEAR AND CONVINCING EVIDENCE THAT BOTH THE SETTLOR'S INTENT AND THE TERMS OF THE TRUST WERE AFFECTED BY A MISTAKE OF FACT OR LAW, WHETHER IN EXPRESSION OR INDUCEMENT." For a tax issue, reformation is permitted if done "IN A MANNER THAT IS NOT CONTRARY TO THE SETTLOR'S PROBABLE INTENTION" in order to "achieve the settlor’s tax objectives. This should cover problems with over-funding a credit shelter trust due to a change in the estate tax exemption. It is also designed to allow for the creation of a special needs trust for a beneficiary who becomes disabled after the trust is drafted or after the death of the settlor 14-10501 – Creditor issues – trustee protected "A TRUSTEE HAS NO LIABILITY TO ANY CREDITOR OF A BENEFICIARY FOR ANY DISTRIBUTIONS MADE TO OR FOR THE BENEFIT OF THE BENEFICIARY TO THE EXTENT A BENEFICIARY'S INTEREST IS PROTECTED BY A SPENDTHRIFT PROVISION OR IS A DISCRETIONARY TRUST." 14-10503 – Creditor issues – spendthrift exceptions No spendthrift protections for child support. Special needs trusts are exempt from this (although AHCCCS has always prohibited these payments). 14-10504 – Creditor issues – discretionary trusts Discretionary trusts are creditor protected, even if there is no spendthrift clause and even if "THE TRUSTEE HAS NOT COMPLIED WITH THE APPLICABLE STANDARD OF DISTRIBUTION OR HAS ABUSED THE DISCRETION REGARDING DISTRIBUTIONS". Life insurance death benefits are creditor protected, even if payable to a trust. Statute recognizes the creditor protections of ARS 20-1131. Creditor protection exists if beneficiary is also trustee as long as trust is discretionary, to include use of the ascertainable standard. 14-10505 – Creditor issues – self-settled trusts For irrevocable trusts, "A CREDITOR OR ASSIGNEE OF THE SETTLOR MAY REACH THE MAXIMUM AMOUNT THAT CAN BE DISTRIBUTED TO OR FOR THE SETTLOR'S BENEFIT". A creditor of settlor cannot force the exercise of a power of appointment by a third party. Special needs trusts seem to have blanket creditor protection. No protection for statutory allowances if probate estate is insufficient. Intentionally defective grantor trust provisions will not effect creditor protection. Crummey powers can be reached and exercised by creditors of beneficiary but this does not apply to lapsed withdrawal rights that do not exceed a "5&5" power. QTIPs are also protected. The "maximum benefit" language may have created, albeit inadvertently, an important planning opportunity. It appears that a settlor can create and fund an irrevocable trust but only takes back, say, an income interest. Is the principal now protected, assuming there is no fraudulent conveyance issue? It appears the answer is yes. This protection may be enhanced by providing for a co-trustee. This may lessen the reach of the "maximum benefit" language since it can be argued that the refusal of a co-trustee to consent to a distribution to the settlor may decrease the "maximum amount that can be distributed to or for the settlor’s benefit". One wonders how the lending community will react to this. Will they require a debtor to revoke his creditor protection rights? Or agree to forgo creating an irrevocable self-settled trust? 14-10506 – overdue distributions Holdbacks aka overdue distributions are creditor protected, even if otherwise mandatory, if "THE TERMS OF THE TRUST EXPRESSLY AUTHORIZE THE TRUSTEE TO DELAY THE DISTRIBUTION TO PROTECT THE BENEFICIARY'S INTEREST IN THE DISTRIBUTION". No time limit in which overdue distributions must be made. 14-10602 – amendment by agent or conservator An agent under a POA may amend or revoke a trust if the trust or POA expressly authorizes it. A court may authorize a conservator to do so if not prohibited by the terms of the trust. 14-10604 – trust contest Any litigation to contest the validity of a trust must be brought within one year of settlor’s death or within four months after trustee has sent notice of the terms of the trust. Statute does not address what happens of there is more than one settlor (eg, surviving spouse). 14-10813 – notice to beneficiaries Unless the terms of the trust state otherwise, a trustee must keep "qualified beneficiaries" reasonably informed unless "THE TRUSTEE DETERMINES THAT IT IS UNREASONABLE UNDER THE CIRCUMSTANCES TO DO SO". Sec. 14-10103(13) defines a "qualified beneficiary" as "A DISTRIBUTEE OR PERMISSIBLE DISTRIBUTEE OF TRUST INCOME OR PRINCIPAL" or who would be a distributee if a current distributee’s interest was terminated. 14-10817 – Distribution on termination Once a beneficiary has received notice of a proposed distribution for the termination of a trust, the beneficiary has 30 days from the date of mailing to object. 14-10818 – trust protector The concept of a trust protector is recognized, to include the power to amend a trust for tax or other reasons. 14-11004 – attorneys fees Reasonable fees will be authorized for litigation engaged in with good faith 14-11005 – statute of limitations There is a one year statute of limitations to bring a claim against a trustee for breach of trust if "THE BENEFICIARY OR A REPRESENTATIVE OF THE BENEFICIARY WAS SENT A REPORT THAT ADEQUATELY DISCLOSED THE EXISTENCE OF A POTENTIAL CLAIM FOR BREACH OF TRUST AND INFORMED THE BENEFICIARY OF THE TIME ALLOWED FOR COMMENCING A PROCEEDING". Otherwise, there is a two year statute beginning on the date of the trustee’s death or resignation or of the termination of the trust. Note that this section only deals with breach of trust and that sec. 14-10604 deals with the validity of the trust. Also note that this applies to any beneficiary, not just a qualified beneficiary, so that any contingent beneficiary is bound by this section. 14-11008 – trustee exculpation Relief from liabilities is not enforceable as to bad faith or "reckless indifference". If exculpation was done at the behest of trustee, it is valid only if it is "FAIR UNDER THE CIRCUMSTANCES AND THAT ITS EXISTENCE AND CONTENTS WERE ADEQUATELY COMMUNICATED TO THE SETTLOR". 14-11010 – trustee’s torts Trustee will be liable for torts committed during administration if trustee "IS PERSONALLY AT FAULT". 14-11013 – certification of trusts The use of certifications of trust is encouraged. A certification should include: 1. THAT THE TRUST EXISTS AND THE DATE THE TRUST INSTRUMENT WAS EXECUTED. 2. THE IDENTITY OF THE SETTLOR. 3. THE IDENTITY AND ADDRESS OF THE CURRENTLY ACTING TRUSTEE. 4. THE POWERS OF THE TRUSTEE. 5. THE REVOCABILITY OR IRREVOCABILITY OF THE TRUST AND THE IDENTITY OF ANY PERSON HOLDING A POWER TO REVOKE THE TRUST. 6. THE AUTHORITY OF COTRUSTEES TO SIGN OR OTHERWISE AUTHENTICATE AND WHETHER ALL OR LESS THAN ALL ARE REQUIRED IN ORDER TO EXERCISE POWERS OF THE TRUSTEE. 7. THE MANNER OF TAKING TITLE TO TRUST PROPERTY. B. A CERTIFICATION OF TRUST MAY BE SIGNED OR OTHERWISE AUTHENTICATED BY ANY TRUSTEE. C. A CERTIFICATION OF TRUST MUST STATE THAT THE TRUST HAS NOT BEEN REVOKED, MODIFIED OR AMENDED IN ANY MANNER THAT WOULD CAUSE THE REPRESENTATIONS CONTAINED IN THE CERTIFICATION OF TRUST TO BE INCORRECT. Third parties can request copies of the excerpts mentioned above and are protected if they rely on the certification. However, "A PERSON MAKING A DEMAND FOR THE TRUST INSTRUMENT IN ADDITION TO A CERTIFICATION OF TRUST OR EXCERPTS IS LIABLE FOR DAMAGES IF THE COURT DETERMINES THAT THE PERSON DID NOT ACT IN GOOD FAITH IN DEMANDING THE TRUST INSTRUMENT". This does not appear to apply to beneficiaries. 14-11014 – Conversion of total return trusts A trustee is permitted, "in its sole discretion and without approval of the approval of the probate court", to convert an income trust to a total return trust or vice versa and to change the percentage used in a unitrust calculation that cannot be less than three percent or more than five percent. Notice must be provided to the settlor and all qualified beneficiaries. |
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TAX TIPS FOR THE SMALL BUSINESS OWNER Presented by Thomas J. Murphy Murphy Law Firm, Inc. P O Box 51244 Ahwatukee Station Phoenix, AZ 85076 480-838-4838 www.murphylawaz.com
THOMAS J. MURPHY is the sole shareholder in Murphy Law Firm, Inc., located in the Ahwatukee area of Phoenix. His practice emphasizes estate planning, elder law (to include nursing home issues), all probate matters (to include contested matters) and tax controversies. He was the 1999-2000 President of the Estate Planning, Probate and Trust Section of the Maricopa County Bar Association. He was selected by the National Academy of Elder Law Attorneys to serve on its prestigious Steering Committee to plan NAELA’s annual 2002 Advanced Elder Law Institute. He serves on the Advisory Board of the Phoenix Tax Workshop and the Editorial Board of the Maricopa Lawyer. He has been published in many national, state and local professional journals writing on a wide variety of legal and tax matters. His articles on the impact of the new HIPAA regulations on health care powers of attorney and related documents have garnered Tom wide recognition as one of the nation’s foremost authorities in this field. His articles explaining recent IRS regulations for required minimum distributions from retirement plans have been widely published and were the featured articles in the August 2, 2002 and April 6, 2001 editions of Tax Practice, the nation’s leading weekly tax journal. His articles on beneficiary deeds and financial powers of attorney were prominently featured in the June 2002 and December 1998 issues of Arizona Attorney. Both articles have been widely praised and are considered to be the definitive source of authority in Arizona on the topics. He has been cited as a leading authority on estate planning law in the March 2002 edition of SmartMoney magazine, published by the Wall Street Journal and the June 2004 edition of Bloomberg’s Wealth Advisor. He has been invited to speak before such groups as the National Academy of Elder Law Attorneys, the State Bar of Arizona, the Arizona Society of Certified Public Accountants, the Arizona Federal Tax Institute, the Maricopa County Bar Association, the West Maricopa County Bar Association, the Mohave County Bar Association, the Coconino County Bar Association, the College of Estate Planning Attorneys, the Phoenix Tax Workshop, the Estate Planning Tax Study Group, the Prescott Estate Planning Council, Prudential Financial, Mesa Community College and Phoenix College. He is a member of the National Academy of Elder Law Attorneys, the Tax Law, Probate & Trust Law and Mental Health & Elder Law Sections of the State Bar of Arizona and the Arizona Medicaid Planning Council. He has served on numerous state and county bar association committees and was selected to be the State Bar representative to the Arizona Supreme Court’s Committee on Reform of Lower Jurisdiction Courts. He is also one of the most experienced trial attorneys in the Southwest, having been the sole or lead counsel in over 100 jury trials. He has successfully litigated cases in the United States Tax Court, the Arizona Tax Court and the Arizona Board of Tax Appeals. He has represented clients before all levels of the Internal Revenue Service and Arizona Department of Revenue. He was born and raised in Attleboro, Massachusetts, a suburb of Boston. He is an honors graduate of Tufts University with a double major in economics and history. He received his law degree from Suffolk University Law School with a concentration in taxation. He is a former officer in the United States Air Force with assignments to the 314th Combat Support Group, Little Rock Air Force Base, Arkansas and the 401st Tactical Fighter Wing, Torrejon Air Base, Spain. He is married to the former Ana Maria Orrantia, a native Arizonan who is a Professor of Nursing at Mesa Community College. They have four children.
Not quite. The after-tax effect of expensing items reduces the cost by the tax bracket you are in. For most of us (those with taxable incomes of $58,100 up to $117,250), this effectively reduces the price by 25%. You can expense (and not depreciate) up to $100,000 of business-related purchases. Special deal for big SUV’s ends this year – can expense up to $100,000 (rather than normal limit of $10,710) for purchase of auto in excess of 6,000 lbs. 2. How Long Should I Hold Onto My Records? Answer: hold onto as many of your records for as long as you can. First, if you never file, the period for the IRS to contest the return never starts to run. It also never begins to run if a return is filed that is fraudulent or constitutes willful tax evasion (usually, unreported cash) If you file a return, the IRS has three years to challenge the return. The Arizona Dept of Revenue has four years. If a return has omitted 25% of gross income, the period is 6 yrs. Once a deficiency has been assessed, the tax can be collected by lien or levy. The IRS has 10 years to initiate and complete collection activity. As a result of all of this, an enforceable deficiency due the IRS can linger for 15 years or longer. You need to keep records for at least that long. 3. Maximize retirement contributions These numbers increase each year. For 2004: SEP – 25% up to $41,000 SIMPLE -- $9,000 401(k) -- $13,000 plus $3,000 catch-up if over 50 Other qualified plans – 25% up to $41,000 IRA’s -- $3,000 plus $500 catch-up if over 50 Protected from creditors, plaintiffs lawyers, etc Exceptions – IRS (maybe) & (soon-to-be) ex-spouses 4. Put your children on your payroll Can pay children up to $4,850 per child per year TAX-FREE Can use this to fund a Roth IRA (which requires earned income) – great way to fund a college education If your child is under 17 and you are a sole proprietor, no withholding for payroll taxes Make sure you can document hours worked 5. Put your spouse on your payroll If spouse is not otherwise employed, spouse can participate in retirement plan. Attribution rules among spouses no longer apply. Easier to deduct travel with spouse 6. Repayment of loans by owner If owner has loaned $ to business, treat $ as return of principal rather than as W-2 (ie, taxable) income 7. Home office deduction Rules have changed making it much easier to take this deduction. No longer the audit flag it once was. Allows you to deduct portion of utilities, insurance & maintenance. Can depreciate portion of home or deduct portion of rent. Also eliminates commuting costs. To qualify, must have office in home that is used exclusively for business. 8. Fringe benefits Creates, in effect, a tax-free raise Expense reimbursement – Cellular phones, dues & licenses, professional subscriptions, tools & supplies, seminars, working clothes & uniforms Child & dependent care – up to $5,000 per employee per year Tuition reimbursement $5,250 per employee per year Maintains or improves work skills Covers tuition, fees, books, supplies & equipment Accident and health insurance, including disability and long term care. Medical costs reimbursement Group term life insurance – up to $50,000 per year Meals for employees – for 100% deduction, must be provided on premises and for convenience of employer 9. Gifts The deduction for gifts to business associates cannot exceed $25 per recipient per year .10. Estate planning issuesVery critical area – planning for death or incapacity. What will happen to your business if you die or can no longer work? Upon your death, estate taxes can loom very large. For 2004 and 2005, the estate tax applies to all property (not just income) with a combined FMV at death of $1.5M. Begins at a 45% rate. For married couples, this can be doubled to $3M through the use of an "A/B" trust. Property left to spouse also qualifies for the "marital deduction", which means that the property is not taxed until the death of the surviving spouse. Having a trust works two other advantages in addition to the estate tax. One advantage is that it avoids probate. A trustee can be put in place the day you die. With probate, a personal representative or conservator must be appointed which could take weeks or months. Many important business decisions will require prior court approval. Your business records become a matter of public record. The second advantage is that it prevents your minor children from receiving their entire inheritance at age 18. You can create a "Symington" trust that will protect these assets from the children’s future creditors or ex-spouses as well as preventing the children from wasting the funds. The most difficult estate planning issue for business owners is succession – who will get the business? Particularly difficult where nearly all of the value of your estate is in the business. Crucial to address this if you have partners – you must address the 3D’s – death, disability and divorce. What is the value of the business and how do we value it? How much will be paid to buy out a partner and where will the money come from? Life insurance looms large here. |