Big Trouble in Little 401K: Eighties Movies and the 401K Liability Timebomb

This is Gizmo.


For those of you who are children of the eighties, you probably recognize this cuddly little fella as the star of the classic comedy horror film, Gremlins.  If you are a business owner, you may struggle to realize the relevance of Gizmo to your company’s 401K plan, but your ability to do so could be a matter of life and death for your business.  Since we’re in a cinematic mood today, let’s address The Good, The Bad and The Ugly, in that order.

The Good

Like Gizmo (and his other Mogwai brethren), your 401K plan often times starts out as a cute and cuddly creature.  Perhaps your financial advisor or HR director mentioned that this would be an effective way to provide additional benefits to your employees.  A vehicle that can 1) help you retain good talent 2) lower your tax bill and also 3) provide significant protection from creditors?  Not even the DeLorean or the Millenium Falcon can do that!  The benefits of 401K plans can certainly have us dancing like Kevin Bacon in Footloose.

The Bad

Mogwai, like all pets, require careful maintenance.  The three big rules for the proper care of a Mogwai are as follows:

  1. Do not expose it to bright lights or sunlight – this will kill the Mogwai;
  2. Do not get it wet; and
  3. Do not feed it after midnight.

Similarly, business owners are required to take good care of their 401K plans.  In fact, there is a Federal Law called ERISA which imposes a fiduciary duty on business owners to carry out certain responsibilities.  Some of the most important responsibilities include:

  1. Prudently select and monitor investments – this means that you have to choose appropriate investments for your employees and monitor them regularly to make sure they remain appropriate;
  2. Ensure that fees are reasonable – this means you have to pay attention to the marketplace and assess on a regular basis as to whether the fees are reasonable;
  3. Operate the plan in accordance with the plan terms – this means that you can’t just stick your plan in a drawer and forget it about it. You actually have to read, understand, and accurately carry out the terms of the plan; and
  4. Act in the best interest of the employees and avoid conflicts of interest.

The Ugly


Most business owners aren’t professional investors and most of them aren’t lawyers.  Given their lack of expertise or knowledge, they often fail to respect the rules imposed upon them.  “C’mon … how bad could it be?” you ask?  Just like with Gizmo, if you don’t follow the rules, that adorable 401K plan can turn into a nasty batch of Gremlins that can wreak havoc on your company.  The courts are full of recent judgments of tens of millions of dollars against businesses that failed to give these rules the proper respect.  Even for seemingly small “mom-and-pop” businesses, minor mistakes can cost the business hundreds of thousands or even millions of dollars.

Reading this far has probably made you sadder than Steel Magnolias.  However, there is a New Hope.  With knowledge there is power, and now that we know the risks, we can address them.

Hire a Caretaker for Your Mogwai or 401K plan

It is possible for a business owner to outsource much of the risk associated with operating a 401K plan by hiring an independent, conflict-free advisor to review the plan, select the investments and monitor them going forward.  When selecting such an advisor, it is not enough to choose your golf buddy or your father’s brother’s nephew’s cousin’s former roommate (a la “Spaceballs”), some due diligence is required in order for you to fulfill your fiduciary duty.  Generally, it is best to hire advisory firms or consultants who are registered under the Investment Advisor’s Act of 1940, otherwise known as Registered Investment Advisors (“RIAs”).  These RIAs are also required to act as fiduciaries in their dealings with the employer and the plan administrator.  Having independent, product-agnostic advisors also eliminates the potential conflict where a captive agent might be tempted to recommend proprietary investments.  Often times, these advisors will assist and educate employees on financial planning to maximize their chances of fiscal success, further reducing the risk of litigation.  Similarly, independent Mogwai caretakers offer comparable benefits.

Hire An Expert When Your Mogwai or 401K Plan Requires an Audit

To paraphrase Ronald Reagan, it is not enough to trust but you should also verify.  To that end, it is prudent to enlist the help of an accounting firm that is experienced in 401K audits to make sure that the plan is being administered appropriately.  This is critically important when your plan has over 120 eligible participants or when the plan otherwise requires an audit.

As with finding a good caretaker for your Mogwai, spending some time and energy upfront to select the right accounting firm is key to success.  There are many accountants out there who are willing to conduct these audits but according to a recent study by the Department of Labor, there were serious problems found with nearly 40% of all employee benefit plan audits.  Here are some things to look for when interviewing accountants:

  1. The number of 401K plan audits conducted each year;
  2. The extent of specific annual training the accountant has received in auditing plans;
  3. Whether or not the accountant’s audits have recently been peer reviewed by another CPA, and if so, whether such review resulted in negative findings.

In conclusion, your 401K is a fickle beast.  It requires time, attention, and care so that it can remain healthy and bring you all of its wonderful benefits.  While maintaining your 401K plan properly can be a daunting task, the good news is that you don’t have to go it alone.  By finding good wingmen to run and audit your plan, you can free yourself up to attend to your core competencies while still acting in the best interest of your employees.  After all, even Maverick had Goose.


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BroTato Ship: Business Development Lessons from Rob Gronkowski’s Booze Cruise Playbook


Imagine that you are hosting the most epic booze cruise ever.  What would it look like?

Lemon drops.  Glowsticks.  Chicks twerking.  Live hip-hop.  Jagermeister shots.  Your parents?

These are my parents “getting down” at an ice cream parlor in Princeton, NJ last Thanksgiving.  They’re CRAAAZY.


By now, I’m sure you’ve all heard about Rob Gronkowski’s over-the-top bro-fest on the high seas.  While most of the media coverage seems to be focused on deconstructing the societal impacts of “the Gronk” or on enjoying the general debauchery vicariously, I’m primarily interested in learning about how the Gronk can make us all better businesspeople.

Lesson One: Be Authentic

In the professional world, there is a lot of pressure to conform.  Some of it is very real and some of it exists in merely the mind of the professional himself.  While most of us certainly can’t act exactly the same at work as we do when on spring break, we should strive to the true to who we are within professional parameters.  One of the reasons why people like Gronk is because he’s unapologetic about who he is.  The guy brought his parents to a raging boat party and wasn’t concerned about his “street cred.”  That’s pretty cool.

Lesson Two: Broadcast Yourself

Your personality is like a parcel of real estate.  There is no other one exactly like it in the world.  Like real estate, your personality should be an asset on your balance sheet and produce value for you.  This works best if people actually know who you are and what you’re about (see Lesson One).  The goal should be not to have everyone like you, even the Gronk isn’t batting 1.000, but rather to allow the people who are genuinely attracted to you and predisposed to doing business with you to surround you, while allowing the people who generally aren’t to stay away.  While the Gronk  went to pretty elaborate means to showcase his personality in this case, there are lots of simple things we can do to broadcast ourselves.  We can join interest groups or organizations or we can host smaller events like lunch n’ learns or happy hours.  We can play golf with our clients or serve on the board of a local nonprofit.  Me personally?  I like to broadcast myself through public speaking and writing inane blog articles.  Is it working?

Lesson Three: Collaborate With Others

If you’ve spent any time networking, you have probably spent some time with a relative stranger talking shop at a Starbucks or a Corner Bakery.  You probably have asked seemingly pointed questions like “Wh0 is your ideal client?” or “How do you differentiate yourself from your competitors?”  Of the conversations you’ve had of this variety, how many of them do you actually remember?  Chances are they’ve all bled together into a unremarkable slurry of hazy memories.  The bad news, your counterparts probably feel the same way about you.

So how do we stand out from the crowd?  One effective way I’ve found of doing this is by looking for collaboration opportunities with the professionals I want to build a stronger relationship with.  Just like Gronk recruited performing artists Flo Rida and Waka Flocka Flame to participate in his event, so too can you find opportunities to collaborate. The key here is making sure that all parties will benefit.  In this case, Gronk was able to provide high profile entertainment for his guests while the performers got great publicity and media coverage that they otherwise wouldn’t have gotten.  Similarly, you might try inviting your networking contacts to work on a joint client meeting, co-write an article, or give a presentation together.  It’s easy to put your best foot forward when you’re at Starbucks, but collaborating on such projects really allow the participants to see each other in a different light.  This often requires much more effort but it is a much more memorable experience and the increased social equity that is built is well worth it.


Imagine that you’re back at your boat party, but this time, you own the yacht.  The sun is setting on the Carribean horizon and you raise a glass skyward.  The glasses of your 100 closest friends rise in unison.  “To Gronk” you say, “We couldn’t have done it without the lessons you taught us.”  Jimmy Buffett’s “Cheeseburger in Paradise” starts playing as the sun fades to black.

All you have to do is reach out and make it happen.


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Love, Tax-ually: The Tax and Legal Implications of Tying the Knot

propose-on-valentines-daySix years ago, my wife and I celebrated our first Valentine’s Day together.  We were at a fancy steak restaurant enjoying a romantic conversation when out of nowhere she handed me a red velvet box.  I fondly recall that day when my wife gave me my first pendant from the Jane Seymour Open Hearts Collection.  **SWOON**  I was completely smitten, but I digress.

It is estimated that roughly 6,000,000 couples get engaged every Valentine’s Day.  Think about that.  That is a lot of chocolates, diamonds and chocolate diamonds (if you shop at Zales).  It’s a pretty romantic day.  For those of you hopeless romantics who are considering getting engaged this Valentine’s Day, but want to look before you leap, I thought it would be fun to examine the tax and legal ramifications of marriage.  After all, only fools rush in, right?

In addition to enjoying the benefits of having a soul mate, someone who cares about you no matter what and who’ll put up with your morning breath (to a point), marriage comes with a number of (often overlooked) tax benefits that come with marriage.

  • Unlimited Spousal Gifting: Generally speaking, you can transfer an unlimited amount of assets from spouse to spouse without incurring Federal Estate and Gift Taxes. For those of you who are unfamiliar with what Estate & Gift Taxes are, they are a tax on assets you transfer to others either 1) during your lifetime or 2) at your death.  The current tax rate for these taxes is 40% but it only applies once you’ve used up your unified exemption.  The current exemption amount is $5.45 million per spouse and is indexed for inflation.

    The unlimited spousal deduction can be very helpful in protecting assets from taxes when you have one very wealthy individual who marries another individual who is not so financially blessed (i.e. J. Howard Marshall and Anna Nicole Smith).  In such a case, Mr. Marshall can pass along a large amount of assets to his much younger spouse, tax-free, in order to defer any estate taxes due upon his impending death.  Furthermore, Anna Nicole Smith will have a largely unused exemption which can be used to protect more of Mr. Marshall’s assets upon her passing.

  • Stepped Up Basis For Community Property: Under most circumstances after you sell an asset that appreciated in value you pay a capital gains tax. If that asset is owned by an individual at the time of their death, the IRS allows for what is called a “step up in basis” whereby any capital gains in the asset are eliminated up to the fair market value of the asset on the decedent’s date of death. Let’s say a married couple purchase a beachfront rental property as community property in Manhattan Beach in 1975 for $100,000 and the property is now worth $1,000,000. If the property is sold while the couple is still living, there would be a capital gain on $900,000, the difference between the sales price and the original purchase price (assuming no capital improvements).  If the property is sold after one spouse passes away, the new basis in the property would be the fair market value on date the spouse died, in this case, $1,000,000.  This means that the surviving spouse could sell the property for $1,000,000 without incurring any capital gains.  Let’s assume instead that the property was owned as joint tenants by two first cousins.  If one cousin died and the surviving cousin sold the property immediately afterwards, there would only be a step up on 50% of the property and the other 50% would keep the original basis for capital gains purposes.  Without getting too technical, married couples who own assets as community property can eliminate significantly more capital gains tax on death than non-married individuals who own assets jointly.
  • Federal Income Tax Savings: Couples whose incomes vary widely often receive tax savings as a result of filing jointly as a married couple. Usually when one spouse with a relatively high income marries and files jointly with a spouse with a significantly lower income, the additional income is usually not enough to push the couple’s combined income into a higher tax bracket.  However, because the income tax brackets are wider for married couples, a larger percentage of the couple’s income is now taxed in lower brackets, thus lowering their income tax bill.

However, just as every rose has its thorns, so too does marriage also have some negative tax and legal ramifications.

  • Federal Income Tax Penalties: In contrast to the example above regarding couples with widely varying income, married couples with roughly equal paying jobs are often penalized with high income tax bills. This is due in large part to the fact that although tax brackets are wider for married couples, they are not twice as wide as the equivalent brackets for single individuals.  Where both spouses make substantially similar amounts of income, much of their joint income is pushed up into higher tax brackets, resulting in a higher overall tax bill.
  • Joint and Several Liability for Community Property: For those of you who live in community property states like California, Texas or Arizona, all of the property you acquire during the course of your marriage (absent a prenuptial agreement or other select exceptions) is considered community property. People often assume that community property means that everything is owned 50/50 by each respective spouse, but that is not actually true.  Much like Tom Cruise and Katie Holmes became a singular entity called “TomKat” or Ben Affleck and J-Lo became “Bennifer” so do all other spouses in community property states similarly merge upon marriage.  As such, in the eyes of the state, Tom and Katie’s communal assets were owned 100% by TomKat.  One exceptionally onerous aspect of community property is that it is wholly subject to the liabilities of each spouse.  If Katie’s creditors secured a judgement against her, the entirety of TomKat’s communal assets would be available to fulfill the judgement regardless of whether or not Tom was involved.  Understanding how to structure communal assets to provide additional asset protection is extremely important, especially for professionals or business owners since they generally are at heightened risk of liability.

As with all things, marriage is about tradeoffs and compromise.  This applies even to the tax and legal ramifications of Holy Matrimony.  The moral of the story here is, if you plan properly beforehand, you can maximize your chances of living happily ever after.

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Leave It To the Kardashians: Lamar Odom Shows Us That Incapacity Planning Isn’t Just for the Elderly


No one expects or plans to be seriously injured or ill. Lamar Odom probably didn’t plan on going into a coma during his alcohol and herbal sexual enhancement supplement fueled visit to that Nevada brothel, but these things happen. We all do stupid, perhaps life threatening, things from time to time and most of the time we just luck out. YouTube is filled with people risking death and quadriplegia in search of a well documented thrill.But you don’t need to belong to a fight club or jump off cliffs in a flying suit to find yourself seriously injured and unable to speak. All it may take is a bicycle ride and a distracted food truck driver or too many drinks and an uneven staircase for you to land yourself in your local hospital on a respirator.

How do you find power when you find yourself powerless, unconscious and surrounded by people speaking in hushed tones at your hospital bed? By thinking ahead and creating an Advanced Health Care Directive. It will give you power when you are powerless.

If you’re unconscious, unable to communicate, what treatment would you want? Who do you want to speak for you if you can’t speak? With a directive you have the power to spell out what treatment you would want and not want and who should be making decisions for you.

Without such a document a petition could be filed in probate court so it can be determined if you have the capacity to make medical decisions and if not, to designate someone to make those decisions for you. The petition can be filed by a “relative or friend of the patient, or other interested person.”

We strive to try to maintain as much control over our lives as we can. In what could be the most critical moment in your life, when you’re at the crossroads between life and death, would you want your estranged wife Khloe deciding whether or not to “pull the plug”?

If not, do yourself a favor. Execute an Advanced Health Care Directive before that UPS truck with your name on it crosses your path.

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Silly Rabbit, Change Your Beneficiary Designations: What Donald Sterling Teaches Us About Making Better Estate Planning Decisions

Donald Sterling and his "Silly Rabbit" V. StivianoBy now, I’m sure you’re all familiar with the tale of Donald Sterling.  Self-starter lawyer builds up a successful practice and real estate empire.  Purchases NBA franchise on the cheap.  Then blows it all with some very unfortunate racist comments that were recorded and made public by an ex-girlfriend.  The public firestorm that ensues ultimately results in his franchise being sold for approximately $2 billion (yes, that is billion, with a B) over his objection by his estranged wife who had him somewhat surreptitiously declared incapacitated by a couple of friendly doctors.  Given his incapacity, his wife was able to take over his family trust and sell the team without his permission.

I know what you’re thinking, “Boo hoo, Donald Sterling made himself $2 BILLION and you want us to feel sorry for him?”  No, I don’t.  I merely want to utilize Donald Sterling as a case study to illustrate some things to consider when planning your own estates.  Let’s get started:

Don’t let your ex-wife make decisions for you

Donald and Shelly Sterling have a complicated relationship, to say the least.  They have been together for sixty years and have three children from their union.  The longevity of their marriage notwithstanding, Donald has had several mistresses during this time, most famously with V. Stiviano, the self-proclaimed “Silly Rabbit,” who released the even more famous recordings of Mr. Sterling’s racist musings.  Due to such infidelities and God-knows what else, Donald and Shelly became estranged in 2012 when she kicked him out of their Malibu beach home and he took up residence in Beverly Hills.

Stop the tape.

At this moment, there are a number of changes that Donald and Shelly could have made to their estate plan to prevent a loss of control.  Granted, without being intimately familiar with the details of their marriage, it is difficult to prescribe an exact plan of action for Donald and Shelly specifically, but I hope to illuminate some issues to consider in the event of an estrangement or especially in the case of a divorce.

In this case, Donald and Shelly could have amended their estate plan so that the other spouse did not have complete control of the trust in the event one spouse became incapacitated.  For instance, they each could have appointed an incapacity trustee to act in their stead other than their spouse.  This would have allowed Donald to appoint his own representative to act on his behalf with regard to the management of the trust assets instead of leaving full control to Shelly.

In the event of a divorce, the issues are much more clear-cut.  Once the divorce is finalized, it is important to review the estate plan to remove the ex-spouse where appropriate.  In most cases, this requires a complete purging of the ex-spouse from all documents.  Most notably, the ex-spouse should be removed from any positions of authority within the estate plan (i.e. trustee, executor, attorney-in-fact, health care agent, etc …).  In addition, the ex-spouse should be removed as beneficiary from all estate documents, including the trust, will, retirement plans and life insurance policies.  I have come across a number of occasions where a client has passed away with the ex-spouse still named as a beneficiary on an account or insurance policy.  That’s a recipe for litigation.  Not fun.

Think About The Definition of Incapacity

In the Sterling case, Shelly was able to have Donald declared incapacitated by having two doctors certify that he was unable to make his own decisions.  By having him declared incapacitated, she was able to gain full control of the trust to sell the team.  In drafting estate documents, there is a lot of flexibility in how we define incapacity.  Requiring two doctors to make a written determination of incapacity is a pretty typical definition, but there are other options as well.  Clients can appoint an individual or panel of persons who have the authority to determine incapacity or even build in more complicated measures.  These individuals do not have to be medical professionals but in fact can be laypersons.  Given his ongoing estrangement from Shelly, Donald could have given his primary care physician or some other family members the authority to make an independent determination of his capacity.  This would have prevented Shelly from being able to hire two doctors who were friendly to her to provide the determination.

In well-functioning marriages, another option is to give each spouse the immediate ability to act for the other.  This is not dependent on incapacity and can make it easier for the healthy spouse to take care of an incapacitated spouse because they do not have to worry about getting the requisite doctors’ letters.  This can be very helpful in a situation where a spouse is in a “gray area” with diminished capacity but the doctors are reluctant to make a full determination of incapacity or where a subject has dementia but refuses to cooperate with the loved one that is trying to take him or her to the doctor for an examination.

Capital Gains are a Pain

In 1981, Donald (and Shelly) Sterling bought the San Diego Clippers from Irv Levin for a song.  A song worth $12.5 million.  Fast forward thirty-four years and the Clippers were sold to former Microsoft CEO Steve Ballmer for approximately $2 billion.  That’s a pretty nice return on investment!

However, all that glitters isn’t gold.  Hidden below the headline are the taxes.  Most specifically, capital gains tax.  Assuming that Donald did not invest in significant improvements to the Clippers over the years, there is a taxable gain of slightly less than $2 billion.  With top capitals gains rates of 20% (Federal) and 13.3% (California), we are looking at an approximate tax bill of over $650 million.

Alright, alright, so taxes suck.  What else is new?  Here’s the lesson.  If the Sterlings had not been forced to sell the team, it is almost certain that they would have held on to it until one of them passed away.  Why?  Because of capital gains.  One of the “gifts” that the Federal government gives us is something called a “step up in basis.”  It’s a pretty cool gift, but the catch is that you have to die in order to receive it.  Basically, in the event of a person’s passing, the government allows for the basis in all of that person’s appreciable assets to be “stepped up” to the fair market value of that asset on the date of the person’s death.  For instance, in the Sterlings’ case, instead of the basis of the Clippers being the $12.5 million purchase price, the new basis in the Clippers would have been the fair market value on Donald (or Shelly’s) death.  Had they played their cards right, Donald and Shelly could have potentially avoided several hundreds of millions of dollars in taxes.

So how does this apply to you?  If you (or perhaps, your parents) are thinking about selling or making gifts of appreciable property, it is always good practice to have them consult with an estate planning attorney or tax professional.  If the appreciable asset, whether it be real estate, stock, collectibles or otherwise, has a significant amount of capital gain associated with it, it may be better to transfer the asset AFTER the owner has passed.  There may be other strategies which can be implemented to deal with this issue depending on the owner’s goals.

As you can see, even in the case of billionaires with high-stakes estate planning, some things can be overlooked.  It is important to revisit your plan periodically and especially in the wake of major life events (birth, death, divorce, increases or decreases in health or net worth) to ensure that those changes are accounted for.

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Is BATFE Driving You Batty? Gun Trusts Streamline Purchase of Firearms for Responsible Owners

BATFEAmericans love their firearms.  This love affair has existed since well before the inception of the Second Amendment and is still going strong today.  We can see evidence of it everywhere, permeating our culture from Hollywood movies to Tea Party Rallies and truck commercials.  To many Americans, their firearms and the ability to possess them represent the exercise of a rugged individualism in the pursuit of happiness.  However, many Americans are also concerned about the ills of irresponsible gun possession recently illuminated by such incidents like Columbine and Virginia Tech.  Over the years, America has been conducting a spirited and often heated conversation with itself about the appropriate level of gun control.  As result of this ongoing conversation, there has been significant legislation passed which places a number of restrictions on the ownership and transfer of firearms.  While many of these laws serve a purpose in keeping dangerous firearms out the hands of unstable or malicious people, they also impose a significant burden on responsible owners who wish to enjoy the use of these guns.

Perhaps the most relevant Federal law regulating the purchase and transfer of firearms is the National Firearms Act (“NFA”).  The NFA regulates the sale, use, possession and transfer of “Title II” Firearms, including machine guns, short-barreled shotguns and rifles, silencers etc …  In order to make, manufacture, purchase or transfer Title II Firearms, one must file an application with the Bureau of Alcohol Tobacco Firearms and Explosives (“BATFE”) along with a $200 payment.  However, the requirements don’t end there.  BATFE also requires all individuals to obtain a signature from a Chief Law Officer (“CLEO”) as well as submit photographs and fingerprints for entry into the FBI’s database.  These additional steps are often burdensome for the responsible gun owner.

With regard to the signature requirement, BATFE requires the CLEO to attest to the fact that he has no reason to expect the applicant to commit any wrongdoing with the weapon they are making or transferring.  Furthermore, the officer must also state that the applicant will not be in violation of state or local law by possessing a Title II Firearm.  Because of this, many CLEOs are reluctant to sign off on such transfers because they do not want to subject themselves to any potential liability in the future.  Others may refuse to sign for political reasons.  For instance, they may not like the idea of individuals arming themselves in their jurisdiction.  Others may refuse to sign because they are unfamiliar with the documents or forms involved, or they may subject the applicant to stringent background checks in order to feel comfortable enough to sign off.

In addition to the CLEO requirement, the fingerprint submission requirement also complicates the transaction as well.  For those of you who have ever had to submit fingerprints for a Federal background check, you understand the costs involved.  The burden is not limited only to the cost of the fingerprint submission, but also the time involved in waiting for approval from the Federal Government, which can take several months.  It is also not uncommon for fingerprints to be retaken as well, if the FBI deems the first set to be unsatisfactory.

One way to streamline this process is by creating a Gun Trust.  A Gun Trust is an entity created for the purchase or transfer of Title II Firearms.  According to the National Firearms Act, only individuals are subject to the fingerprint and CLEO requirements.  Other entities, such as trusts, corporations and limited liability companies, are not subject to these requirements.  Of these entities, the Gun Trust is usually the best suited for personal use as it does not have required costs or filings which must be submitted to state governments.  Another living benefit of the Gun Trust is that it allows the creator to easily add additional trustees without filing a new application with BATFE.  These additional trustees would have the same ability to utilize and possess these firearms.

Not only does the Gun Trust reduce the burdens in procuring Title II Firearms, but it also promotes responsible gun ownership.  Often times when firearms are a part of a typical estate, the executor or trustee can get into trouble if they transfer the guns to an individual who is legally prohibited from receiving it (i.e. minor children, beneficiaries in other states, felons).  The Gun Trust is designed to provide thoughtful instructions from the creator to the trustee to help guide them away from transactions which would subject the trustee to personal liability and violations of the law.  Furthermore, the Gun Trust can be drafted to give the trustee more discretion to deal with changing circumstances where a beneficiary has exhibited behavior which would put his or her ability to handle firearms in doubt.

America’s love affair with guns does not mean that everyone should be able to have one.  While our society is still struggling to determine how best to handle the issue of gun control, the Gun Trust does offer an avenue for responsible owners to efficiently acquire and transfer their firearms.

Brian Y. Chou is an estate planning attorney based in Southern California at the Law Firm of Barth Calderon, LLP.

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Getting What We Give: Understanding the Fallacies Behind Charitable Work


Charities should be poor.

I sit on the board of a local non-profit and I happen to have a Masters in Business Administration.  Yet only until very recently have I realized that how wrong this idea is.  Up until this point, the mention of charitable or nonprofit work would conjure up in my mind humble mendicants in tattered frocks scrounging up donations to serve some underserved segment of society.  It seemed natural to me that those do-gooders in the non-profit world would forego the material trappings of the world-at-large.  After all, the term “non-profit” almost expressly says as much.  However, I recently saw a video clip which completely changed my thinking on this issue, and I wanted to share it with you.

If you have clicked on the link above, you can stop reading as the remainder of this article will basically be a summary of its contents.  However, I wanted to pass this idea along as I think it is an important one.

The way that we think about charity in America is influenced in large degree by Puritanical beliefs.  The Puritans came to America in search of religious freedom, but also in search of economic profits.  In comparison to other colonists, the Puritans were extremely capitalistic.  The Puritans were also Calvinists, and one of their core beliefs was that acting in self-interest was a one-way ticket to eternal damnation.  One way the Puritans strove to reconcile these conflicting beliefs was through charitable work.  They used charity as a method of doing penance for all of their profit-making.  Necessarily, the charity could not make money as it was done specifically to counteract the spiritual effects of other profitable activities.  Over time, the idea took root that charitable work should not or cannot result in financial gain.  This idea has not changed in four centuries.

One significant offshoot to this idea is that it is improper for charities to utilize their operating budget for overhead.  The funds donated should be used to buy soup for the kitchen, shelter for the homeless, mosquito nets for the sick, not advertising time for the cancer center or computers for the head start program.  It’s natural to feel this way, as many people who give their hard-earned money to causes want to ensure that the money is used to further the mission, as opposed to lining the pocket of a greedy CEO.  While this thinking is understandable, it is somewhat misguided.  We should look at overhead as a necessary part of the investment required to further the cause.  The cancer center can use the advertising time to grow their donor list and the head start program can operate more efficiently with the proper infrastructure, which means more money for the cause.  Investing in overhead boosts the charities’ capabilities and allows them to increase the amount of good they can do.  Which charity does more societal good?  The bake sale that raises $100 and donates 90% to its mission or the fundraising organization that raises $1,000,000 and donates 50%?

This thinking is also applied to the hiring of employees and executives.  Executives of charitable organizations often make a pittance compared with their counterparts in the for-profit world.  Much of this is a function of the idea that charitable endeavors should not result in personal profit, as such profit would besmirch the purity of any altruistic motives.  In reality, allowing charities to spend more on hiring quality people will result in more smart, motivated and innovative people to enter the non-profit realm.  Many of today’s best and brightest students disproportionately end up graduating to jobs in places like Wall Street, where the money is great but the work may not necessarily be socially fulfilling.  Allowing charities to attract top talent will give many of these people the opportunity to utilize their talents in the furtherance of social good without foregoing the promise of a stable financial future.

In closing, I wanted to leave you with one thought.  Non-profits are businesses.  The main difference between a non-profit company and a for-profit company is that a non-profit must reinvest its profits in furtherance of its mission, where a for-profit company uses its profit for the benefit of its owners and shareholders.  By freeing non-profits from the restraint of keeping overhead low, we allow them to operate like true businesses and maximize the amount of money they can apply to their cause, resulting in a profit to society.

Brian Y. Chou is an estate planning attorney based in Southern California at the Law Firm of Barth Calderon, LLP.

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Proceed Write to Court: Beastie Boy’s Death Illuminates Why Its Not a Good Idea to Amend Your Own Will

They say that the pen is mightier than the sword.  This is one of those examples where that saying is true.

For those of you who are children of the eighties, the Beastie Boys have probably touched your lives, or at the very least, your ears.  An iconic hip hop act with a Hall of Fame career that has spanned three decades thus far, the Beastie Boys have given us many classic songs such as “(You Gotta) Fight for Your Right (To Party),” “No Sleep Til Brooklyn,” and “Sabotage.”  Sadly, one of the members of the Beastie Boys, Adam “MCA” Yauch, recently passed away of cancer, leaving behind his wife, daughter and an estate of approximately $6.4 million.

Fortunately, Mr. Yauch had the foresight to put together an estate plan to allow his loved ones to easily carry out his wishes in the event of his passing.  However, he made a mistake which may cost his estate dearly.  Regrettably, Mr. Yauch decided to take pen to paper and amend a portion of his will.  Now, Mr. Yauch is not alone in making this mistake.  Clients often cross out sections of their estate documents or write additional notes in the margins, much to the chagrin of their estate attorneys.  The main reasons why clients are typically discouraged from engaging in such independent editing are 1) clients may not be aware of the unintended consequences of their amendment and 2) clients may not be able to draft an amendment which clearly reflects their true intent.  I hope that Mr. Yauch’s situation will serve as a real life example as to why it is generally best to consult with your attorney if you are considering making changes to your estate plan.

In the case of Mr. Yauch, his attorneys drafted him a will with the following provision:

“Notwithstanding anything to the contrary, in no event may my image or name be used for advertising purposes.”

This is not an atypical clause for a celebrity.

However, Mr. Yauch, interlineated an additional handwritten phrase so that the will now reads:

“Notwithstanding anything to the contrary, in no event may my image or name or any music or any artistic property created by me be used for advertising purposes.”

The original clause was meant to protect the use of Mr. Yauch’s image and name, otherwise referred to as his publicity rights, which according to New York State Law, are protected for 70 years after his death.  However, by editing his will, Mr. Yauch raises a whole new host of copyright issues which will likely be litigated over many years to come.

Unlike publicity rights, which are regulated by state law, copyrights are regulated by the federal government.  According to the United States Copyright Act, as the creator of a musical, artistic or other creative work, Mr. Yauch has the exclusive right to publish, sell and control the use of his work.  After his passing, this same right is then represented by his estate.  Of the numerous copyright issues his estate must confront, the most prominent is the true intent of his amendment.  Did he mean for this amendment to apply only to works solely created by him?  Or did it include works he created with others or in his capacity as a member of the Beastie Boys?  How broadly did he consider the term “advertising?”  Should this include promotional marketing for the Beastie Boys Greatest Hits Album or is this limited to marketing for large corporations like Coca-Cola or Pepsi?  These issues will most likely take years of litigation to resolve.

Had Mr. Yauch brought up these issues to his attorneys, they could have properly determined his intent and drafted language which specifically laid out exactly what he wanted, while taking into account the various wrinkles in the law which would have an affect on his estate.  This way, Mr. Yauch could have had his wishes represented while avoiding unnecessary litigation and making sure that any other unintended adverse consequences were eliminated.


Brian Y. Chou, Esq. is an estate planning attorney based in Southern California at the Law Firm of Barth Calderon, LLP


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Protecting Your Fiefdom: Issues for First Time Landlords to Consider

Owning investment real estate can be a very rewarding and profitable experience, but it can also be a huge headache and a drain on resources.  Having recently purchased my first investment property, my head is filled with conflicting images of myself sunbathing on my private island or lying penniless in a gutter.    The possibilities and the liabilities seem endless.

While real estate is often a great way to store wealth and create streams of passive income, it does come with a myriad of strings attached.  Unlike stocks or bonds, real estate often requires a “hands-on” approach and exposes an owner to significant liabilities.  Here is a sampling of situations where an owner may incur liability for their property:

  • A tenant trips and falls down a flight of stairs due to a defective handrail
  • A tenant’s child drowns in a pool which isn’t adequately fenced off
  • A branch on a tree on your property which isn’t adequately trimmed falls on a third party’s car
  • An environmental survey reveals significant contamination on your property which needs to be remediated

These are all situations which could involve a lawsuit or a claim against your insurance.  In certain examples, the liability may be so great that insurance doesn’t cover it, allowing the injured party to come after your investment properties or even your personal assets.  The question here is “how do we reduce this risk?”  In an estate planning context, our goals for investment real estate are to:

  • Protect ourselves from liability while we are living;
  • Preserve our assets to maximize what we pass on to our children or other beneficiaries;
  • Make it as easy as possible for this transfer to occur upon our passing.

One simple and relatively inexpensive way of reducing the liability on investment property is by purchasing an umbrella policy.  An umbrella policy is a policy that provides additional coverage above and beyond your primary policies.  For instance, if you have insurance on your investment property for $300,000 and an auto policy with limits of $500,000, a $1,000,000 policy will increase those limits $1,300,000 and $1,500,000, respectively.  This provides a greater cushion in case you incur significant liability.

Another way to protect yourself is by creating a limited liability company (LLC) to hold your real estate.  An LLC is a legal entity that provides significant benefits to its members.  The primary benefit is that the liability of the owners of the LLC is limited to the assets of the LLC and does not extend to the personal assets of the owners.  By holding your real estate in an LLC, you can compartmentalize your liability to the assets in that LLC.  Let’s say that a tenant unfortunately falls down that flight of stairs we mentioned earlier, suffering severe injuries.  In that case, the tenant can only go after the property held in that LLC.  He can’t get at your personal home or other investments that you have outside of the LLC.  If you have multiple properties, you can create multiple LLCs to maximize the amount of protection you have.

Another benefit of LLCs is that they can be seamlessly blended into an existing estate plan.  It is relatively simple to transfer LLCs into a living trust to allow your loved ones to manage things in the event of your death or incapacity.  Furthermore, as you acquire more assets and build your net worth, you may want to start transferring some of your assets to your children to reduce your estate tax liability.  Transferring fractional shares of your LLCs is not only a easy way to make gifts to your children without losing control of your real estate, but it also allows you to qualify for significant valuation discounts from the IRS when calculating your estate taxes.

Brian Y. Chou, Esq. is an estate planning attorney based in Southern California at the Law Firm of Barth Calderon, LLP.

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More Bite Than Bark: Pet Trust Law Provides More Protection for Fido


Almost 60% of all homes in the United States have at least one pet.  And yet, pets are often overlooked when it comes to estate planning.  One particular reason for this is because pet trusts have proven to be notoriously difficult to enforce.  In a typical situation, an owner will draft a provision setting aside a portion of their assets for their beloved animal.  Obviously, the gift cannot be given to the animal outright because the pet would have no idea how to manage that money.  Instead, the posthumous gift is placed in trust, with a caretaker appointed to use those assets for the benefit of the animal in question.  The problem is that there is no “watchdog” to make sure that the caretaker uses the money appropriately.  California Law did not have any provisions by which a pet trust could be enforced in favor of an animal beneficiary.  The owner of the pet merely had to trust that their appointed caretaker would continue to watch over their pet.  What often happens is the animal is neglected while the caretaker spends the money on himself.

Due to this problem, often times the sick or elderly choose not to purchase a pet for fear that there will be no one to take care of it in the event of the person’s passing.  This is unfortunate because many of these people could benefit from having a pet around to keep them company and to increase their quality of life.

In 2009, a new law came into effect which provides mechanisms for the enforcement of a pet trust.  The law provided that the trust or the court may designate persons to oversee the caretaker to make sure they are properly taking care of the pet.  Furthermore, the law allows “any person interested in the welfare of the animal,” as well as “any nonprofit charitable organization that has as its principal activity the care of animals” to bring an action to enforce the trust.

Under the law, remainder beneficiaries, those who would receive any balance of the trust assets upon the passing of the animal, would have the right to make reasonable requests for an accounting of the trust assets to make sure the caretaker wasn’t wasting the assets.  This power is also given to nonprofit corporations who are principally interested in the care of animals.  Beneficiaries, appointed pet guardians, and interested pet care corporations also have the right to reasonably request an inspection of the animal and the premises where the animal is kept.

While the new law addresses the age old problem of enforcing a pet trust, it also creates new issues which may require careful consideration.  The language with regard to who can enforce the pet trust is very broad.  Oftentimes owners may not want random persons or organizations to be able to meddle in their business, especially if the actions are frivolous or unwarranted.  Moreover, many potential trustees or caretakers might balk at the responsibility due to the increased potential for liability.  The good news is that careful drafting can most likely narrow the scope of liability to an appropriate level for the individual creating the trust.  There are also additional provisions which can be placed in a pet trust to create more oversight without significantly expanding caretaker liability, such as providing for a Pet Care Panel or a Trust Protector, who is generally a neutral entity granted with the power to make changes to the trust in order to protect the pet.

There is quite a bit of thought that goes into planning for a pet’s care after your passing.  If you or a loved one has pets which are not yet provided for in an estate plan, you should talk to your attorney about the myriad of issues and options surrounding pet trusts.

Brian Y. Chou is an estate planning attorney based in Southern California at the Law Firm of Barth Calderon, LLP.

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