Avoiding 'Alter Ego' Status

A business owner was referred to Matthew C. Mullhofer by his long time client. The gentleman wanted to know how to eliminate various business risks by forming different entities in order to control the risk beyond insurance coverage. Creditors like to defeat this type of corporate planning by using a legal theory called “alter ego” which means that they can reach all assets that are controlled by a business owner, in order to satisfy their judgments, so he wanted to know how to avoid this and keep all the entities separate.

Matthew C. Mullhofer explained that the Federal and State Courts have provided a way to avoid having the activities of one entity merged into a sister entity by means of the “alter ego” theory. If a creditor failed to prove the “alter ego” they would not have jurisdiction over the sister entity that has the deep pocket even when they may have personal jurisdiction over the other entity.

In order for a Corporation of LLC to refrain from being considered the alter ego of another entity, Matthew C. Mullhofer explained, it must maintain these corporate formalities:

· It must maintain separate books and accounting records;

· Maintain separate bank accounts;

· File separate tax returns;

· It must be sufficiently capitalized when it enters into business;

· Loans or other capital transactions between entities should work together at an arm’s length transaction

Matthew C. Mullhofer helped his new client set up his businesses in a legal procedure. This in turn helped the client successfully maintain his business entities by following proper corporate formalities.

Call Matthew C. Mullhofer today at (714) 827-9955 to discuss your business ownership questions.

Does the deed to the property you purchased accurately describe the property?

This morning, Matthew C. Mullhofer’s long time client came into the office with a question regarding a recent purchase he was making. For insurance purposes he wanted to know how to find out if the deed to the home he was purchasing accurately described the property. Usually when a buyer purchases a home they rely on the property’s address to describe the real estate property they are purchasing, and when escrow is closing the buyer usually does not double check the legal description of their home in the deed to verify that it correctly describes the property they are purchasing which could cause problems down the line.

Matthew C. Mullhofer explained to his client that deeds will contain two or three lines of a legal description of the property if it is located in a subdivision, and the street address is often included in it as well. If the property is not located in a subdivision, the legal description will be a “metes and bounds” legal description which usually consists of half a page or several pages containing the property’s terminal points and angles. So how does a buyer verify that the description matches the property?

Matthew C. Mullhofer advised that when going over the Preliminary Title Report which states the exact legal description of the property you are purchasing, the following should be observed:

1) If the property you are purchasing is part of a subdivision, it will appear to have straight lines and form a box type area. The legal description is usually relatively easy to read and verify once you confirm a starting point on the property. However, before escrow closes it should be verified that the legal description on the title policy is the same as described in the Preliminary Report.

2) If the property’s legal description is a metes and bounds legal description, the dimension of the meters and bounds should be sketched out by the title company as part of the Preliminary Report and escrow instructions should state the property being insured is illustrated by the drawing.

3) The real issue is, if it is a metes and bounds description the title company will generally require a survey in order to insure the description of the property. In this case, a surveyor should stake out the borders of the property, and provide the title insurance company with a certified copy of the survey of the property. The survey will set forth the legal description. There might be an additional fee to have the title company insure the legal description provided by the surveyor.

Since 1999 The Law Office of Matthew C. Mullhofer has been helping clients with their real estate needs. Please feel free to contact Mr. Mullhofer at (714) 827-9955 to discuss your real estate questions.

Transferring Assets in a Safe Manner

We all want the assets we have worked so hard to accumulate to be taken care of when we pass, especially if we want to pass these assets to a special trust. We would like to know that we did everything we could to make sure everything was in order and our trustees would have no problem in obtaining these assets that we were passing along to them, and this is the exact question Matthew Mullhofer’s long time client came into his office with. What technique can an individual have regarding transferring assets to their heirs in a safe manner? A common question that people want to know is how to safely plan for a Personal Residence Trust, which is an important question because family residence is a major asset, so it is not surprising that safely transferring it to a special trust is important. Congress has enacted a legislation that has approved a type of planning that will benefit all parties involved when doing a Personal Residence Trust.

A qualified personal residence trust can easily be approved if there has been a proper evaluation of the residence and if the parents transfer 50% interest in the residence which is allowed by IRS codification. This is helpful when parents want to keep their separate interest in the residence. The IRS limits this planning to two residences so parent(s) can transfer a second home or vacation home under this planning as well. This type of arrangement is usually done between parent and child, so there is not an increase in property taxes at the end of the fixed term.

A qualified personal residence trust (“QPRT”) is a trust that can be used to transfer your residence to your children at a extremely reduced gift tax cost and with no estate tax, and also allows you to continue to live in the residence for as long as you like is known as. You do not have to transfer your entire interest in the family residence. The Law Office of Matthe Mullhofer can help you with this. This is how it works:

Trust for Fixed Term: While you are still living, you can give your asset(residence) to a trustee, which can be yourself(California state law permits this). The trustee must grant the right for you to live in the residence rent-free for a fixed number of years that is stated in the trust instrument, which would most likely be the number of years that you are likely to survive. During this term, you will pay mortgage expense, real estate taxes, insurance, and payments regarding maintenance and repairs(you can deduct mortgage interest and real estate taxes on your income tax return). When the term is over, the asset stays in the trust for them or is given to your children.

Maintenance after Fixed Term: After the fixed term ends, you can keep using the residence in one of two ways. First, instead of immediately dispersing the residence to your children, the residence can be kept in trust for your spouse's lifetime(this is assuming that the residence is available to you). Or, there is another option of creating a lease with your children which will allow you to live in the residence for as long as you wish. However, keep in mind that if you create a lease you must pay market value rent to your children after the fixed term ends so the residence is not being charged estate tax on your death.

If you are still living when the fixed term of the QPRT is over, your estate tax will not include the value of the residence. If you don't live through the fixed term, the estate tax will be affected as if you hadn't created the trust in the first place.

The rules regarding a QPRT can be complex. If you are contemplating setting up a QPRT, feel free to contact Matthew Mullhofer to discuss this matter.