Author: Onsager Law Office

Leasing Key Assets to the Business as a Creative Solution to Provide for Children Inactive in the Business

As it can create a variety of challenges for both the effective administration of the business as well as the ongoing relationship between children active and inactive in the business, business owners often see the value of transferring business interests to the children active in the business, while transferring other assets to children not active in the business.  But what happens when the business is a very substantial asset in the business owner’s estate, and the business owner cannot treat all the children equally without transferring business interests to the children not active in the business?

Under these circumstances, it can sometimes be a part of the solution to transfer certain assets, such as real estate, to the inactive children and provide for a long-term lease of such assets by the business.  Not infrequently, business owners may lease certain key assets, such as real estate and equipment, to the business.  Providing for the transfer of such assets to the inactive children, and potentially providing for a long-term lease of such assets by the business, may:

  1. permit assets associated with the business and an important part of the business owner’s estate to be transferred to the inactive children;
  2. permit actual ownership interests in the business to be transferred exclusively (or to a greater extent) to children active in the business; and
  3. minimize sources of tension between active and inactive children as to the ongoing administration of the business by the participating children.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

Providing Business Interests to Children When Only Some are Actively Involved in the Business

There are substantial issues to consider when contemplating granting ownership interests in a business to children who are not active in the business, as well as to children who are active in the business.  There are many ways in which issues can arise.

Children not active in the business may second guess the business decisions of the participating children in various ways.  Is too much income of the business being distributed as salaries, leaving the nonparticipating children with too little dividend income?  The nonparticipating children may also take the view that too much of the company profits are being reinvested in the company instead of being distributed as dividends.  Are the participating children taking too many business risks and risking the future of the company?  Are the participating children borrowing too much money on behalf of the business which is impinging on the ability of the company to make profit allocations and risking the long-term viability of the company?

If the nonparticipating children are unhappy with how the company is being run and have minority interests in the business, for a variety of reasons they may be in a difficult position to sell their interests.  As a result, they could feel trapped and resentment could grow between the participating and nonparticipating children.

Even if the participating and nonparticipating children fundamentally get along, conflict may nonetheless arise as the children’s spouses weigh in and express their opinions.

Depending on a business owner’s circumstances, it is not always feasible to simply provide that the participating children will receive the interest in the business, while the nonparticipating children will receive other assets, particularly if the business interest is the most valuable asset in the business owner’s estate.  However, depending on the circumstances, there can be creative solutions to address these issues even if the business interest is the most valuable asset in the estate.

To what degree have you developed an estate plan for your business and family that address these issues?  In developing a plan that is right for your business and family, you will want to consider administrative, relationship and financial issues and goals.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

Contemplating S Corporation Status? Consider Estate Planning Flexibility and Restrictions on Ownership.

Business owners can often be overwhelmed with working out the details of how they are going to get through the day, much less contemplating how their current choices on business organization may affect estate planning for their business and their families down the road.  An advantage to an S Corporation election can be the avoidance of double taxation of income (once when the corporation is taxed for this income and once when shareholders are taxed for the distribution of this income) while still retaining other benefits of incorporation.  However, along with this advantage, there are restrictions associated with an S Corporation election that may complicate certain estate planning objectives when it comes time to plan for the transfer of the business owner’s interest after his or her death.

One common estate planning tool used by business owners is to create a revocable trust.  Transferring assets to a revocable trust during life, and providing for the transfer of assets to the revocable trust through beneficiary designations, can permit:

  1. assets to pass to heirs outside of the court probate process, simplifying administration and avoiding probate fees;
  2. planning as to when and under what circumstances family members will inherit, including the creation of additional trusts that will be administered for the benefit of family members until certain conditions are met; and
  3. coordination of various assets to effectuate intent as to who should benefit financially from the estate, in what amount, and how.

However, with an S Corporation election the federal government imposes restrictions on the types of trusts that may own an interest in an S Corporation.  This can complicate, or in some cases thwart, a business owner’s planned use of a revocable trust to provide for his or her family.

For example, the federal government does permit a “qualified subchapter S trust” to be a shareholder of S corporation stock.  However, the challenge for business owners is that the federal government imposes severe restrictions on the design of a “qualified subchapter S trust.”  In order to qualify to hold S corporation stock, a “qualified subchapter S trust” must:

  1. have only one income beneficiary of the trust during the life of the current income beneficiary;
  2. distribute any trust principal only to the sole income beneficiary during the life of the current income beneficiary;
  3. provide for the termination of the income interest of the sole income beneficiary either on the sole income beneficiary’s death or when the trust terminates;
  4. distribute all of the trust assets to the sole income beneficiary if the trust terminates during the life of the sole income beneficiary; and
  5. name a sole income beneficiary who is an individual who must be a citizen or resident of the United States.

Possibly the biggest issue associated with the “qualified subchapter S trust” for many business owners is that they often desire to design their trusts to have more flexibility to provide for multiple family members in varying amounts and under various circumstances over the life of the trust.  This becomes an increasing issue to the extent that the corporate interest represents the dominate asset in the estate of the business owner.

Under federal law, a business owner may also consider making an “electing small business trust” the shareholder of S corporation stock.  In important ways the “electing small business trust” is a more attractive option for business owners developing their estate plans, including permitting the trust to have multiple beneficiaries and permitting the trustee discretion to either accumulate trust income or distribute trust income among the trust’s various beneficiaries.  However, substantial disadvantages of the “electing small business trust” include:

  1. the requirement that all income of the trust must be taxed at the highest marginal federal income tax rates; and
  2. for business owners wanting to provide for charities as a part of their estate plan, an “electing small business trust” may not be a charitable remainder annuity trust or a charitable remainder unitrust.

How may S Corporation restrictions complicate the estate planning you may want to complete now, or down the road?  A great time to consider these questions is when first forming the business.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

 

Contemplating S Corporation Status? Consider Estate Planning Flexibility and Preferred Stock Limitations.

Electing S Corporation status can appear to be, and may be, an attractive option for certain business owners.  For example, with an S Corporation election, the S Corporation may enjoy many of the advantages that otherwise exist with a C corporation, but avoid the double taxation associated with C corporations: first the corporate income tax on its profits and then shareholders being taxed again on profits distributed to them as dividends.

However, while an S Corporation election may permit business owners to avoid the double taxation of income associated with C Corporations, S Corporation business owners must also abide by the restrictions that come along with an S Corporation election.  Two such related restrictions are that an S Corporation:

  1. can generally only have one class of stock; and
  2. will not be treated as having more than one class of stock solely because of differences in voting rights among the shares of common stock.

But what if preferred stock would be desired as a part of a business owner’s estate plan?  [Remember that preferred stock generally entitles the holder to a fixed dividend, the payment of which takes priority over any dividends paid to holders of common stock.]  For example, a business owner might wish to grant preferred stock to children not active in the business, but permit children active in the business to be paid salaries and to reap the additional benefit of successful company performance through the payment of common stock dividends.  Alternatively, a business owner might wish to grant preferred stock to children active in the business with the logic that those most invested in the business should be the first ones to receive any profits from the business.  Such arrangements would not be permissible for S Corporation business owners.

How may S Corporation restrictions complicate the estate planning you may want to complete now, or down the road?  A great time to consider these questions is when first forming the business.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

Can I have a court order an emergency seizure of property to protect my trade secret?

What if a computer or flash drive contains a trade secret that has been acquired by improper means, and the trade secret is at risk of further unauthorized disclosure or use?  Under the federal Defend Trade Secrets Act of 2016, a trade secret owner may petition a federal court to seize such property without providing advance notice of the seizure.  However, in addition to other requirements, a federal court will not order such a seizure unless:

  1. “an immediate and irreparable injury will occur if such seizure is not ordered”‘
  2. the harm to the trade secret owner in denying a property seizure outweighs the harm to the person currently in possession of the property if a seizure is ordered;
  3. the harm to the trade secret owner in denying a property seizure substantially outweighs the harm to any other third party who may be affected by the seizure;
  4. the person in possession of the trade secret (and associated property) likely either misappropriated the trade secret by improper means or conspired to use improper means to misappropriate the trade secret;
  5. the trade secret owner must be able to describe the property to be seized and its current location; and
  6. the court concludes that the person in possession of the property will “destroy, move, hide, or otherwise make such matter inaccessible to the court” if the person is notified of the court action.

If a federal court orders such a seizure, the court will also require the trade secret owner to post bond to provide payment to the party subject to seizure if the seizure is subsequently determined to have been wrongful or excessive.  In addition, any property seized will initially be held by the court and not by the trade secret owner.

Under emergency conditions with a lot at stake, this may be a valuable new tool for certain trade secret owners under the right circumstances.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

How does the law protect the owner of a trade secret?

Wisconsin and federal law protect the owner of a trade secret from “misappropriation.”

First, what is misappropriation?  To misappropriate something is generally to take something dishonestly for your own use.

Second, and more importantly, if Wisconsin and federal law protect the owner of a trade secret from misappropriation, what does misappropriation of a trade secret mean under Wisconsin and federal law?

Under both Wisconsin and federal law, misappropriation of a trade secret includes acquiring the trade secret of another person when one knows or has reason to know that the trade secret was acquired by improper means.  Under federal law reverse engineering and independent derivation are not improper means to acquire a trade secret, but the following are improper means to acquire a trade secret: “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.”

Under both Wisconsin and federal law, misappropriation of a trade secret also includes disclosure or use of a trade secret  of another without express or implied consent by a person who:

  1. Derived it from or through a person who utilized improper means to acquire it.
  2. Acquired it under circumstances giving rise to a duty to maintain its secrecy or limit its use.
  3. Derived it from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.
  4. Acquired it by accident or mistake.  In order to be misappropriation of a trade secret under federal law for a trade secret acquired by accident or mistake, the person must have known or had reason to know that the trade secret was a trade secret.

In laymen’s terms, Wisconsin and federal trade secret law will protect the owner of a trade secret from the dishonest acquisition of the trade secret by another person.  The owner of a trade secret may be more likely to have protectable rights if individuals with access to the trade secret:

  1. Have a duty to maintain its secrecy or limit its use.
  2. Know or have reason to know that the trade secret is, in fact, a trade secret.

What steps has your company implemented to protect its trade secrets?  What steps has your company implemented to ensure that it may not be liable for misappropriation of a competitor’s trade secrets from new employees or independent contractors?

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

What is a trade secret?

What is a trade secret under Wisconsin and federal law?

Under both Wisconsin and federal law, a “trade secret” generally involves three things:

  1. certain types of information which may be protected as a “trade secret”;
  2. the information derives independent economic value (either actual or potential) from not being generally known to, and not being readily discovered by proper means by, others who could obtain economic value from its disclosure or use; and
  3. the information is subject to reasonable efforts to keep it secret.

Under Wisconsin law a “formula, pattern, compilation, program, device, method, technique or process” are types of information which may be protected as a “trade secret” if points 2 and 3 above also apply.

If points 2 and 3 above also apply, the following types of information may be protected as a “trade secret” under federal law: “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.”

Congratulations, you may have a trade secret if you have protectable information under either Wisconsin or federal law to which points 2 and 3 above also apply.  But what reasonable business processes are you developing and what reasonable legal steps are you taking to protect  the secrecy of your trade secret?

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts. Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations. As a result, the information in this blog post does not represent legal advice. If you are in a situation where you need or desire legal advice, we would be happy to help. Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

 

What is a trust and how is a trust created under Wisconsin law?

There is all of this talk about trusts and using trusts to create an estate plan.  But what is a trust and how is it created?

Great questions.

At its essence, a trust involves:

  • a settlor(s) who have an intention to create a trust and who fund the trust; and
  • a trustee who has a fiduciary obligation to manage the assets of the trust for the benefit of current and future beneficiaries of the trust.

Again, a “settlor” is a person who creates a trust or contributes property to a trust.  In order for a trust to be validly created under Wisconsin law, the settlor(s) of the trust must be of sound mind and 18 years of age or older, and the settlor(s) must indicate an intention to create a trust.  In order to be validly created under Wisconsin law a trust must also generally have an ascertainable beneficiary/beneficiaries, the trustee must have duties to perform, and the same person may not be sole trustee and sole beneficiary.

After meeting these requirements a trust is created if:

  • a settlor transfers property to another person as trustee;
  • an owner of property declares that he or she holds certain property as trustee (provided the owner of property is not sole trustee and sole beneficary); or
  • a declaration by any person that they intend to create a trust accompanied by an expectation that property of the person or others will be transferred to the trust.

Again, once a trust is created and funded by the settlor(s), the essence of a trust is a trustee who has a fidicuary obligation to manage the assets of the trust for the benefit of current and future beneficiaries of the trust.  Put another way, a trust involves the management of trust assets by the trustee on behalf of the trust’s beneficiaries.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts. Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations. As a result, the information in this blog post does not represent legal advice. If you are in a situation where you need or desire legal advice, we would be happy to help. Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

Retirement Accounts and Wills vs. Trusts–Part 2

So, Paul, I got this.  I name my trust as beneficiary of my retirement accounts instead of my will/estate, and, presto, my beneficiaries can stretch out the time period over which they withdraw my retirement account balances.  This may help to avoid higher income taxes and may extend the period over which they earn income in these accounts income tax free.  Right?

Maybe.

Maybe?

Complicated federal law governing retirement accounts requires proceeding with care.

Again, the issue will be whether you have named a “designated beneficiary” under federal law.  You may be considered to have named a “designated beneficiary” even though your trust is the named beneficiary if:

  1. the trust is valid under state law (or would be but for the fact that the trust has no assets);
  2. the trust is currently irrevocable or will become irrevocable upon your death;
  3. trust beneficiaries are “identifiable” from the trust document;
  4. required documentation is provided to the plan administrator of your retirement account; and
  5. all trust beneficiaries are individuals.

Naming a properly constructed trust as beneficiary of your retirement accounts may permit your beneficiaries to extend the payout period for your retirement accounts (with the associated benefits of an extended payout period) and can permit you far more freedom to direct the utilization and administration of these funds on behalf of your beneficiaries through the trust.  There can also be certain benefits that may be foregone by not naming individual beneficiaries directly, such as potentially losing the spousal rollover option.  However, for many clients a properly constructed trust can be an attractive option as beneficiary of their retirement accounts.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

Retirement Accounts and Wills vs. Trusts–Part 1

For many of us, our retirement accounts are one of our most important assets for providing for our families.  However, complicated federal law can have unexpected and important implications for your estate planning. Naming your will/estate as the beneficiary of your retirement account (instead of a properly crafted trust or individual beneficiaries) can lead to both higher income taxes as well as fewer years in which assets in your account can grow income tax-free.  Why?

In order to extend the payout period for a retirement account, it is important to meet federal requirements for having named a “designated beneficiary.”  If an individual’s will/estate is named as the beneficiary of the individual’s retirement account, the individual will not be treated as having named a “designated beneficiary.”  If, for example, the individual dies before his or her required beginning date to begin receiving payments from his or her retirement account, and has no “designated beneficiary” (because the individual’s will/estate is the beneficiary of the retirement account), under federal law the retirement account must be paid out over 5-years instead of being paid out over a potentially longer period of the life expectancy of the individual(s) who will receive the funds from the retirement account under the will.  This can potentially reduce the period of time in which assets could continue to grow income tax-free, and potentially move the beneficiary into a higher income tax bracket if the income from the account is being paid out over a relatively short time period.

In Retirement Accounts and Wills vs. Trusts–Part 2, we will look at the implications of naming a trust instead of an individual’s will/estate as the beneficiary of a retirement account.  Stay tuned and Happy Friday!

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]