Mark A. Bregman, Estates and Trusts Lawyer


Posts Tagged “Arizona law”

The New Reality of Single Member Limited Liability Companies (SMLLCs)

If you’re looking for a way to protect your assets from creditors and lawsuits you should consider creating a Limited Liability Company (LLC).  An LLC is a business entity that combines the benefits of a business partnership and a corporation and protects your assets while still allowing you to retain control over them.  Desirable characteristics of LLC include that it can be formed by a single member, does not have to have a business purpose, and does not require a separate tax return or annual filings to maintain its existence.  LLCs can be a wonderful tool… but not all LLCs are created equal.

Arizona asset protection enjoys a competitive advantage over the laws of many other states because the drafters of the Arizona LLC law omitted creditor friendly portions of the Uniform Laws that allowed creditors to foreclose their charging order liens to realize on the underlying assets owned by the LLC.  This puts Arizona LLCs among the country’s elite LLCs for asset protection.  This enhanced protection is commonly known as the “charging order as the exclusive remedy,” and until recently was thought to be absolute in states like Arizona.  However, this enhanced protection is now being eroded by developing case law, and even in an LLC-friendly state such as Arizona the yellow flag of caution must be out for a Single Member LLC (SMLLC) as protection of its assets from its member’s creditors.

The Battle Between Creditors and SMLLCs

In the 2003 Colorado bankruptcy case Ashley Albright, the Court allowed a bankruptcy trustee to stand in the shoes of the debtor and control the assets of the debtor’s SMLLC.  First thought to be an aberration limited to its facts, in fact that decision was correctly decided and a warning to all SMLLCs.  The true lesson of that case is stay out of bankruptcy court if you expect to protect the assets in a SMLLC because the bankruptcy trustee steps into the place of the debtor and can control the assets inside the SMLLC if there are no other members to protect.

Then in 2005, in an Arizona bankruptcy case case, In re Ehmann, a decision since vacated when the parties settled, Judge Haines articulated a theory that if a limited partner had a passive role in the governance of a family limited partnership, the bankruptcy trustee could under some circumstances succeed to the interest of the debtor limited partner, formulating a theory about the impact of the executory nature of the limited partnership interest.  While not particularly interesting because it broke no new intellectual ground –the bankruptcy trustee always had that bundle of rights, the case is interesting and instructive because the general partner governed the limited partnership to the detriment of the bankruptcy trustee giving rise to a right to dissolve the partnership and reach the underlying assets, the case is nevertheless instructive.  The case is important because it is the vanguard case signaling that the remedy of judicial dissolution can be used by creditors in a variety of circumstances where no other remedies exist.

The next important case is the recently published Florida Olmstead case where the Florida Supreme Court failed to decide the question certified to it by the Federal District Court about the remedies available against a SMLLC, but rather held that a charging order was not the exclusive remedy against a single member limited liability company because single member limited liability companies lacked other members whose interests needed to be protected.

The Florida Supreme Court refused to interpret the state statute and instead chose to fashion a remedy designed to protect creditors against artificial barriers in collection procedures.

It has been suggested elsewhere that a strict reading of exclusive remedy statutes (such as the one in  Arizona) invites judicial activism to shape remedies as did the Florida Supreme Court which has now given it’s imprimatur to the creditor friendly theory.

Arizona-Specific SMLLCs

Although SMLLCs are good asset protection entities protecting a member’s other assets from claims by creditors of the SMLLC (commonly called inside out protection), even that protection is limited if the member has signed a guarantee or can be held directly responsible as the actor giving rise to the claim.

The importance of the omission in Arizona law of the right to foreclose the charging order means a judgment creditor is entitled to a lien against a member’s interest in an LLC, but the creditor is only entitled to receive distributions that would otherwise be made to the member.  If the LLC makes no distributions, then the creditor receives nothing except the satisfaction of making life difficult for the debtor.  In states that follow the Uniform Laws or have their version of the charging order statute, the creditor may foreclose its lien on the member’s interest and force its way into the governance of the LLC; this is not the case in Arizona.

In single member limited liability companies, this means the creditor may have an absolute right to distributions from the SMLLC, but the debtor retains control over the assets of the SMLLC and the timing of distributions.  This is a most undesirable result from the point of view of the debtor.

What Does This Mean For You?

The battle will continue over the distinction between economic rights and governance rights in SMLLCs. How much deference to a plain reading of the statute can asset protectors expect from judges in cases with difficult fact patterns will continue to present a quandary to most.  Practitioners have long argued peppercorn theories of additional members, but the modern genre of reverse piercing and judicial dissolution arguments in an increasingly hostile judicial environment require you to stand up and take notice rather than relying only on statutory constructions.  It will be increasingly important that documents are well drafted in a state with favorable laws and that the ownership and governance provisions of your operating agreements be given particularly attention to achieve your specific goals.  Most importantly specific facts must be analyzed because beginning with the best structure is the key to long term success.

If you think a custom crafted LLC will benefit you, give me a call.

Round Table Discussion: Estate Planning or Asset Protection?

(Photo courtesy of The Guardian)

A typical Thursday night finds me meeting with other lawyers and discussing ideas useful in our respective practices.  Although always trying to find new ideas to help clients, these meetings, reminiscent of old style writer’s salons, are particularly useful because of the opportunity to exchange views in an open setting.  No idea is too simple or outlandish and all opinions are welcome.  It is a refreshing opportunity to be the one asking the stupid question and being amply rewarded with a wealth of knowledge and experience.  The food and drink is usually good, but no match for the companionship.

Recently we were discussing provisions for naming and removing successor trustees and the differences between granting the right to trustees, protectors, and beneficiaries.  I was particularly interested in what powers could be used in what situations with or without running afoul of grantor trust rules that cause assets in an irrevocable trust to be included in the taxable estate of the grantor or beneficiary.

These are important discussions, but often buried in the “black box” of our trusts because the clients lose interest after answering the questions of control, use, and taxes.  My role is to understand the client’s intentions and providing the most flexible rules that still meet the client’s objectives.

Our discussions frequently involve the relatively new “decanting” power under Arizona law, which allows a trustee of an irrevocable trust to make a new trust and add or exclude beneficiaries under certain circumstances.

This evening the point was made that for asset protection purposes attorneys should ensure that there is a power to exclude beneficiaries, and the discussion then quickly turned to whether that was a power best granted to a trustee or a protector in the context of which office could best wield the power in conjunction with a beneficiary’s right to remove and replace the trustee or protector without inadvertently creating a general power of appointment—which would cause estate tax inclusion in the estate of the person wielding the power.

The flash of knowledge that struck me was that although the power to exclude beneficiaries was crucial to a thoughtful asset protection trust, it would almost certainly not sit well with most of my clients that their successor trustee could exclude their chosen beneficiaries, except under very limited circumstances.

That in turn led to the idea of how to design a trust which would grant the power, but include adequate guidelines as to when the power could be exercised, so as to enhance the protection beneficiaries will have from their creditors yet reassure the grantor that the power will not be used to subvert the client’s intentions.

The trusts I create contain many instances of this type of analysis to ensure that my clients are always on the leading edge of what is possible.

If you found this article interesting, please share it with a friend or make a comment.  If you would like to find out more about purposeful planning, please call me.

Domestic Partners Get Visitation Rights

Who would you like to have with you when you are ill or injured in the hospital?  Most likely you would hope to have your partner of many years there with you to hold your hand when things get rough.  Although many of us take for granted that we would be allowed that luxury, until just recently unmarried couples had no assurance that their partner would be allowed to visit them in the hospital—especially if a “recognized” family member such as a parent or sibling chose to refuse access.

In February 2009, Phoenix passed an important milestone when the City Council adopted an ordinance that gives domestic partners, same sex or not, the right to register as domestic partners and establish the right to hospital visitation until the registration is officially revoked.

Before this ordinance, and in other parts of the state, even if the domestic partners had executed health care powers of attorney and HIPAA releases, the family could still exclude the partner from visitation.  Now however, if the domestic partners reside in Phoenix and have registered, they will have established a paramount right to visitation.  Area hospitals outside Phoenix are not bound by the registration and as of now the only other Arizona city with a domestic partners registry is Tucson.  Mesa’s city council is trying to adopt a similar provision, but opposition forces are organizing against the effort.

The registration conveys no other rights, but might be useful in establishing the credentials necessary to obtain benefits where such benefits are offered.

It appears more opposite sex couples than same sex couples are taking advantage of Phoenix’ ordinance, but the ordinance is hailed as a progressive step toward the recognition of human rights across sexual preference boundaries.

Estate planning for unmarried couples is crucial if property rights are to be inherited and disruption to the survivor’s lifestyle is to be avoided.  Traditional tools such as rights of survivorship, POD/TOD, beneficiary deeds, Wills, trusts, and powers of attorney can all effectively be used to provide an estate plan, but the impact on the decedent’s family and the survivor must be carefully considered.  Even small estates must be carefully planned if disputes are to be avoided.

You Think It’s Your Time To Go? “Not So Fast” Says the State of Arizona

Pablo Picasso's "Death of Casagemas"

On July 13, 2009 Arizona governor Janet Brewer signed HB 2616 into law.  The law, hailed by the right to life movement as a great victory, intrudes on your right to privacy and injects the state into the midst of the dying decision of every Arizonan without a living will that expresses the intention to die with dignity.

The law requires every petition for the appointment of a guardian for an incapacitated person to contain a statement that the authority may include the authority to withhold or withdraw life sustaining treatment, including artificial food and fluid.

The law forbids any surrogate without written authority from the patient or a court order from consenting to or approving the permanent withdrawal of artificial administration of food and fluid.
The law provides an automatic stay of not less than 5 days to allow the entry of any order allowing food and fluid to be withheld or withdrawn to be appealed

The law creates a presumption that the absence of a living will means the patient in an irreversible coma or persistent vegetative state did not intend to have food and fluids withheld or withdrawn and the patient intended that all procedures, including medically invasive procedures, be administered in an attempt to prolong the patient’s life.  The law provides stringent guidelines for rebutting the presumption.

Personally, I do not believe the state or any strangers should be involved in any medical decisions, including the most difficult and emotional decisions facing loved ones when the patient is dying.  I believe in the right to privacy, including the right to exercise life and death decisions for your spouse, parent, or child, when that decision is supported by overwhelming medical evidence.  I think your doctors are a better source of information than your government.

However, I respect your right to disagree, and now the state of Arizona gives you a clear choice:  If you do not want food and fluid to be artificially administered once you are in an irreversible coma or persistent vegetative state, you should be certain you have a living will that clearly announces your intentions and a valid health care power of attorney appointing the people you want to direct your medical care if you are unable to do so.

If you fail to create a living will, you and your loved ones may endure the pain and suffering of the full weight of the judicial system oppressing you at your most vulnerable moment.

Protection or meddling?  You decide.

Living Wills, health care powers of attorney, and HIPAA declarations are part of every estate plan prepared by our firm.  We will explain to you the effect of each document and assure that your choice will be plainly heard when needed.