Asset Protection Update: The Curci Investments, LLC Case (pt. 1 of 2) by Martin Shenkman & Alan Gassman
Having Your Discount Gifting Cake…and Eating 529 Plans Too by Alan Gassman
Trump Addresses IRS Tax Regulations-Will 2704(b) be Obliterated?
10 Tips on How to Respond to a Bar Complaint (and How Not to Respond) by Joseph Corsmeier
An Approach to Medical Compliance by Pariksith Singh, MD
If the Banks Start to Fail Again-Will Your Clients’ Accounts & CDs Be Safe? (Part 2 of 2) by Ken Crotty, Alan Gassman & Chris Denicolo with Review by Taylor Binder & Joseph DiNuzzo
Richard Connolly’s World
Thoughtful Corner- Power of Appointment Limitation Provisions by Alan Gassman
We welcome contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer, please email Alan at firstname.lastname@example.org
This report and other Thursday Reports can be found on our website at www.gassmanlaw.com
Don’t Mess With Texas
The fourth largest U.S. city is presently flooded with water, misery, and individual stories of exemplary individuals who have gone well beyond what would ever be expected to help their fellow men and women in America’s worst rainstorm in history.
The Thursday Report salutes everyone who has been involved with this crisis thus far, and urges all readers to do something, actually anything, to help assure that we are all prepared for situations which may come as shocking surprises, notwithstanding forecasts and warnings which may be disregarded or taken far too lightly.
Hurricanes are certainly no exception to the incorrect adage that “This could never happen to us.”
In point of fact, just about anyone reading this Thursday Report could and to some extent might be surprised by a physical hurricane or other personal occurrences which could ruin a day, a month, or a lifetime.
The hurricane season began on June 1st and does not end until November 30th. A Hurricane Preparedness List can be viewed by CLICKING HERE.
Alan will be in New Orleans this weekend in case help is needed in the evenings on Bourbon Street.
You can view the recipe for the “hurricane cocktail” drink that was made famous at Pat O’Brien’s (home of the dueling pianos since 1933) by CLICKING HERE. Please include the ingredients in your hurricane shopping list.
Please think not only of your family, but of three other people who might not be prepared. Please buy more than what your family needs, in case you might be prevailed upon or inclined to share with others.
Please also know what your route out away from a storm will be, under the assumptions that bridges will be closed, and what we can do for people in Houston.
The Hurricane Harvey Red Cross Disaster Relief Fund for Houston can be viewed by CLICKING HERE.
Also, if you email email@example.com and put “Help Houston” in the “RE” line, we will donate $2.00 to the above fund, or $3.00 if you can also tell us who the first president of the Independent Republic of Texas was. He took office in 1836 and died in 1870.
But no fair looking on Wikipedia.
Thanks for enduring a serious Thursday Report. Now let’s get on to some solid information that we can use to help clients and ourselves in a number of ways.
The Thursday Report thanks all readers, contributors and critics.
Finally, please remember, DON’T MESS WITH TEXAS!
Teaching your pets to swim. Every year a number of pets will drown in pools and possibly even floods because they have never been taught to swim.
Teaching your pet to swim can be fun, and also life-saving for both the pet and for you.
People can drown when trying to save their pet from drowning.
To learn more about how to teach your pet to swim CLICK HERE.
And, while at it, why not review your insurances for flood, wind, and do a “what would happen if my properties were obliterated” scenario with your insurance agencies and carriers?
Also, how many days of medicines do you have in reserve at a given time, and what would become of your pets if you needed to go to a shelter?
Do you have a hurricane radio or other device that will automatically wake you up in the middle of the night with alerts for tornadoes or otherwise?
85 Floridians have died in tornadoes in the last 70 years.
Asset Protection Update: The Curci Investments, LLC Case
by Martin Shenkman & Alan Gassman
The authors thank Steven J. Oshins, Esq. for his thoughtful comments and guidance in this area.
Curci Investments, LLC is a case where bad facts may result in possible changes in the law that may harm well intentioned planning for Californian debtors by allowing courts to invade LLCs owned by debtors, as opposed to having a charging order as the sole remedy.
The debtor in Curci behaved in a manner that any professional would find objectionable, and he clearly controlled the LLC in question. There were major mistakes in ignoring the entity formalities, and seemingly little purpose in the entity other than to shield assets from a creditor who was owed only a small percentage of the value of the assets. The entities were controlled and used personally by a husband and wife who were both responsible for the debt, and the only owners of the LLC. It is also noteworthy that the court applied California law, without even considering whether Delaware law should have applied since the LLC was formed and maintained in Delaware.
What will commentators and courts read into such a case? Will this result in a broadening of the attack on legitimate investment entities? There is also always a concern that other state courts may look at this case when evaluating how to handle similar situations. The real risk, however, is that when the courts dealing with asset protection cases reach to do justice, and prevent a bad actor from prevailing, the results could well be misinterpreted or misapplied to harm clients who have conducted themselves in a proper and ethical manner. While Klabacka was a favorable case wherein a Nevada DAPT was upheld as protecting assets from both spousal support (alimony) and child support claims, a number of other recent cases successfully challenged LLCs and trusts used to protect assets. In Leathers, the court held that a taxpayer fraudulently transferred assets to a trust to avoid tax debt. Another reminder that creating entity structures (LLC, corporation, partnership, trust) to protect assets will not succeed if the debtor himself does not respect the integrity of those entities was provided in Transfirst. A trust was held to be a mere nominee for the taxpayer and could be disregarded to satisfy a tax lien. Whether the “weight” of Curci as another bad fact-bad law asset protection case will unduly tip the scales against clients who plan properly remains to be seen. The take home lesson for all practitioners may be to craft more careful and layered plans and emphasize to clients the vital importance of both proper motives and the proper administration of the plan.
- In the Curci Investments, LLC case the California appellate court remanded the case to the trial court to determine whether reverse veil piercing would apply. Reverse veil piercing arises when the request for piercing comes from a third party outside the targeted business entity. The trial court had concluded that reverse piercing was not available, and that the sole remedy of the judgment creditor was a charging order. The debtor sought to add the creditor’s investment LLC (JPBI) as a judgment debtor on a multi-million-dollar judgment it had against the creditor (Baldwin) personally. It warrants noting that the appellate court observed that the debtor’s wife also was liable on the loan to the debtor to the extent that the husband and wife had California community property, and that the LLC was community property. This may turn out to be the distinguishing factor in permitting reverse piercing, which generally requires that a third-party has been harmed in an inequitable manner under circumstances where there is “such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.”
- The debtors did not have the LLC integrated with sound estate tax and multiple trust planning, and may have expected that they would be forced eventually to pay the creditor, given the relatively small percentage of their overall apparent net worth at the time of implementation. The planning these debtors undertook was unlikely to have been recommended or assisted by many California lawyers, given that California law and California Bar rules which make fraudulent transfers, and aiding and abetting fraudulent transfers, criminal acts.
In January 2004, the debtor created a Delaware limited liability company to hold and invest cash balances of the debtor and his wife. It had two members. The debtor husband held a 99% member interest and his wife held a 1% member interest. Debtor was the manager and the chief executive officer of the investment LLC. In these roles, and given his membership interest, he determined when, if at all, the investment LLC would make distributions. Practitioners are well aware that controlling distributions in an estate tax context may be inadvisable as it might result in estate inclusion. The Curci case points out that retaining control over distributions will similarly be a negative factor in the context of asset protection planning.
Two years after forming the investment LLC, the husband/debtor personally borrowed $5.5 million from the creditor’s predecessor in interest. One month after executing the note, the debtor settled eight family trusts to provide for his grandchildren. The investment LLC loaned $42.6 million to three family general partnerships formed by debtor for estate planning purposes. Although all of these loans were due to the investment LLC, the debtor and his wife listed them as “Notes Receivable” on their personal financial statements. This carelessness was interpreted by the court as yet another factor confirming the debtor’s disregard of entity formalities. Practitioners should be alert to clients having financial statements prepared, or even more so preparing statements themselves to submit to lenders, and incorrectly listing trust or entity assets as their own. Similarly, schedules attached to a prenuptial agreement listing entity or trust assets as the clients might also serve to document that the client is disregarding the formalities of those trusts and entities. The challenge in many cases is to successfully educate clients to consult with counsel before undertaking such matters.
The creditor sued and obtained a judgment. The debtor did not respond to the discovery, and the creditor filed a motion to compel resulting in sanctions against the debtor. Antagonizing the court will rarely prove a positive step to enhancing the end result.
The debtor, as manager of the investment LLC, executed amendments to the family notes for $42.6 million to extend their terms by five years to July 2020, with no consideration. While the case did not explain why, presumably this was to further delay their repayment to defer the point in time when the investment LLC might have cash if the creditor pursued it. If a client is going to modify notes or other contractual arrangements, it would certainly be preferable that such steps be taken before the pendency of litigation. Further, any such steps should be taken under the guidance of the client’s advisers who can take precautions to properly structure any changed terms, and to document the arm’s length nature of the modifications or changes.
The creditor made a motion in August of 2014, and after that date any monetary distributions made by the investment LLC to the debtor, in his capacity as a member of the LLC, were ordered to be paid to the creditor instead. This is known as a charging order and has generally been viewed as the only remedy planners wish to permit potential claimants to have.
The creditor at the time of the trial had received no money as a result of the charging order. However, the debtor had caused the investment LLC to distribute $178 million to him and his wife, as members, between 2006 and 2012. There were no distributions made subsequent to the October 2012 entry of judgment on the note due to the creditor. These facts no doubt incurred the ire of the court both as to dollar amount and timing. The cessation of payments on the notes is perhaps somewhat similar to the cessation of distributions during the divorce in the Pfannenstiehl case. The lower court held for the ex-spouse in part perhaps because of the cessation of payments as soon as the divorce was known. Fortunately for clients seeking asset protection, that holding was reversed. But the lesson to be more careful prior to and during litigation seemed to be lost on the defendants in Curci.
The creditor argued that the investment LLC was the debtor’s alter ego, that the debtor was using the investment LLC to avoid paying the judgment and that an unjust result would occur unless that LLC’s assets could be used to satisfy the creditor’s personal debt.
Be sure to read the conclusion in the next Thursday Report!
 Curci Investments, LLC v. Baldwin, Court of Appeal, Fourth Dist., Div. 3, CA G052764 Aug. 10, 2017.
 Klabacka v. Nelson, 133 Nev. Advance Opinion 24 (5/25/2017).
 M.R. Leathers, CA-10, 2017-1 USTC ¶50,212, May 4, 2017.
 Transfirst Group, Inc. v. Magliarditi, 2017 WL 2294288 (D. Nev., May 25, 2017).
 Balice, (DC NJ 8/9/2017) 119 AFTR 2d ¶ 2017-5134.
 Pfannenstiehl v. Pfannenstiehl, 88 Mass. App. Ct. 121 (2015), 37 N.E.3d 15.
Having Your Discount Gifting Cake…and Eating 529 Plans Too
by Alan Gassman
Can a client with a limited partnership make discounted annual gifts and have the partnership own 529 Plans to be used for the education of grandchildren?
Some ask why, we ask why not!
As I believe you understand, your ability to gift $28,000 per year for each grandchild can be used by making direct gifts to buy 529 College Saving Plan accounts for them, or more limited partnership interests worth $28,000 per grandchild can be transferred to the Gifting Trusts (one-half to each trust) to make use of valuation discounts, which is going to be more effective from an estate and gift tax standpoint.
Since the assets in the Gifting Trusts divide into equal shares for the children on the death of the survivor of you and [SPOUSE], this treats each child equally.
The family limited partnership can buy 529 College Savings Plans for the future benefit of the grandchildren in order to have the advantage of the tax savings, whereby the growth in the 529 Plans is never subject to income tax if used to pay for college and graduate school and allowed living expenses associated therewith.
If the limited partnership purchases the 529 College Savings Plans, then when distributions are eventually made for one or more of the grandchildren from the 529 Plans, these will be considered to count against the share of the child who is the parent of that grandchild by the mechanisms permitted under the Gifting Trusts.
You obviously have until December 31st to decide what to do for the grandchildren and to complete whatever that is.
Trump Addresses IRS Tax Regulations-Will 2704(b) be Obliterated?
I think that I shall never see,
Regulations quite like 2704(b)
Internal Revenue Bulletin: 2017-30
|July 24, 2017|
Implementation of Executive Order 13789 (Identifying and Reducing Tax Regulatory Burdens)
Table of Contents
- SCOPE OF THE TREASURY DEPARTMENT’S REVIEW
- REGULATIONS IDENTIFIED FOR BURDEN REDUCTION
- REQUEST FOR COMMENTS
On April 21, 2017, President Donald J. Trump issued Executive Order 13789, a directive designed to reduce tax regulatory burdens. The order instructed the Secretary of the Treasury to review all “significant tax regulations” issued on or after January 1, 2016, and submit two reports, followed promptly by concrete action to alleviate the burdens of regulations that meet criteria outlined in the order. Specifically, the President directed the Secretary, in consultation with the Administrator of the Office of Information and Regulatory Affairs, to submit a 60-day interim report identifying regulations that (i) impose an undue financial burden on U.S. taxpayers; (ii) add undue complexity to the Federal tax laws; or (iii) exceed the statutory authority of the Internal Revenue Service (IRS). The order further instructs the Secretary to submit a final report to the President by September 18, 2017, recommending “specific actions to mitigate the burden imposed by regulations identified in the interim report.”
- SCOPE OF THE TREASURY DEPARTMENT’S REVIEW
From January 1, 2016, through April 21, 2017, Treasury and the IRS issued 105 temporary, proposed, and final regulations. During this time period, Treasury and the IRS issued one regulation—under Section 385 of the Internal Revenue Code—that the Office of Management and Budget designated as significant pursuant to Executive Order 12866. Executive Order 13789 provides, however, that in determining whether a regulation is significant for the purpose of this review, past determinations made pursuant to Executive Order 12866 are not controlling.
Fifty three of the 105 regulations issued during the relevant review period are minor or technical in nature and generated minimal public comment. To ensure a comprehensive review, Treasury treated the remaining 52 regulations as potentially significant and reexamined all of them for the purpose of formulating the interim report.
Based on that reexamination, Treasury has identified regulations that meet the criteria of the President’s order and qualify as significant in view of the Presidential priorities for tax regulation outlined in Executive Order 13789.
III. REGULATIONS IDENTIFIED FOR BURDEN REDUCTION
Treasury has concluded that the following eight regulations meet at least one of the first two criteria specified by Section 2 of Executive Order 13789. Consistent with the order, Treasury intends to propose reforms—potentially ranging from streamlining problematic rule provisions to full repeal—to mitigate the burdens of these regulations in a final report submitted to the President.
- Proposed Regulations under Section 103 on Definition of Political Subdivision (REG–129067–15; 81 F.R. 8870)
These proposed regulations define a “political subdivision” of a State (e.g., a city or county) that is eligible to issue tax-exempt bonds for governmental purposes under Section 103 of the Internal Revenue Code. The proposed regulations require a political subdivision to possess three attributes: (i) sovereign powers; (ii) a governmental purpose; and (iii) governmental control. Commenters stated that the longstanding “sovereign powers” standard was settled law and had been endorsed by Congress, and additional limitations were unnecessary. Commenters also stated that the proposed regulations would disrupt the status of numerous existing entities and that it would be burdensome and costly for issuers to revise their organizational structures to meet the new requirements of the proposed regulations.
- Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) (T.D. 9770; 81 F.R. 36793)
These temporary regulations amend existing rules on transfers of property by C corporations to REITs and RICs generally. In addition, the regulations provide additional guidance relating to certain newly-enacted provisions of the Protecting Americans from Tax Hikes Act of 2015, which were intended to prevent certain spinoff transactions involving transfers of property by C corporations to REITs from qualifying for non-recognition treatment. Commenters expressed concern that the REIT spinoff rules could result in over-inclusion of gain in some cases, particularly where a large corporation acquires a small corporation that engaged in a Section 355 spinoff and the large corporation subsequently makes a REIT election.
- Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview (T.D. 9778; 81 F.R. 45409)
These final regulations provide that persons described in Section 6103(n) of the Internal Revenue Code and Treas. Reg. § 301.6103(n)–1(a) with whom the IRS contracts for services—such as outside economists, engineers, consultants, or attorneys—may receive books, papers, records, or other data summoned by the IRS and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a person who the IRS has summoned as a witness to provide testimony under oath. Commenters objected to the IRS’s ability to contract with outside attorneys and permit them to question witnesses under oath, and the U.S. Senate Finance Committee approved legislation in 2016 that would prohibit the IRS from delegating to third-party contractors the authority under Section 7602. Treasury will review these regulations as they concern the outside attorneys under contract with the IRS to participate in the taking of compulsory testimony under oath.
- Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG–163113–02; 81 F.R. 51413)
Section 2704(b) of the Internal Revenue Code provides that certain non-commercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded in determining the fair market value of an interest in that entity for estate and gift tax purposes. These proposed regulations would create an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest. Commenters expressed concern that the proposed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which would result in increased valuations and transfer tax liability that would increase financial burdens. Commenters were also concerned that the proposed regulations would make valuations more difficult and that the proposed narrowing of existing regulatory exceptions was arbitrary and capricious.
- Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities (T.D. 9788; 81 F.R. 69282)
These temporary regulations generally provide: (i) rules for how liabilities are allocated under Section 752 solely for purposes of disguised sales under Section 707 of the Internal Revenue Code; and (ii) rules for determining whether “bottom-dollar payment obligations” provide the necessary “economic risk of loss” to be taken into account as a recourse liability. Commenters stated that the first rule was novel and would unduly limit the amount of partners’ bases in their partnership interests for disguised sale purposes, which would negatively impact ordinary partnership transactions. Commenters were concerned that the bottom-dollar payment obligation rules would prevent many business transactions compared to the prior regulations and suggested their removal or the development of more permissive rules.
- Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness (T.D. 9790; 81 F.R. 72858)
These final and temporary regulations address the classification of related-party debt as debt or equity for federal tax purposes. The regulations are primarily comprised of (i) rules establishing minimum documentation requirements that ordinarily must be satisfied in order for purported debt among related parties to be treated as debt for federal tax purposes; and (ii) transaction rules that treat as stock certain debt that is issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result. Commenters to the documentation rules criticized the financial burdens of compliance, particularly with respect to more ordinary course transactions. Commenters also requested a longer delay in the effective date of the documentation rules. Commenters to the final transaction rules criticized the complexity associated with tracking multiple transactions through a group of companies and the increased tax burden imposed on inbound investments.
- Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794; 81 F.R. 88806)
These final regulations provide rules for (i) translating income from branch operations conducted in a currency different from the branch owner’s functional currency into the owner’s functional currency, (ii) calculating foreign currency gain or loss with respect to the branch’s financial assets and liabilities, and (iii) recognizing such foreign currency gain or loss when the branch makes a transfer of any property to its owner. Commenters on the regulations stated that the transition rule in the final regulations imposes an undue financial burden on taxpayers because it disregards losses calculated by the taxpayer for years prior to the transition but not previously recognized. Commenters also stated that the method prescribed by the final regulations for calculating foreign currency gain or loss was unduly complex and costly to comply with, particularly where the final regulations differ from financial accounting rules.
- Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803; 81 F.R. 91012)
Section 367 of the Internal Revenue Code generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, subject to certain exceptions. These final regulations eliminate the ability of taxpayers under prior regulations to transfer foreign goodwill and going concern value to a foreign corporation without immediate or future U.S. income tax. Some commenters stated that the final regulations would increase burdens by taxing transactions that were previously exempt, noting in particular that the legislative history to Section 367 contemplated an exception for outbound transfers of foreign goodwill and going concern value. Commenters also stated that an exception should be provided for transfers of foreign goodwill and going concern value in circumstances that would not lead to an abuse of the exception.
- REQUEST FOR COMMENTS
Treasury is requesting comments on whether the regulations described in this notice should be rescinded or modified, and in the latter case, how the regulations should be modified in order to reduce burdens and complexity. Comments from the public are due by August 7, 2017. Comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2017–38), Room 5205, P.O. Box 7604, Ben Franklin Station, Washington, DC 20224. Alternatively, comments may be hand-delivered Monday through Friday between the hours of 8:00 a.m. to 4:00 p.m. to: CC:PA:LPD:PR (Notice 2017–38), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Comments may also be submitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include Notice 2017–38 in the subject line of any electronic submissions. Comments will be available for public inspection and copying.
Pursuant to Executive Order 13777, Presidential Executive Order on Enforcing the Regulatory Reform Agenda, Treasury is responsible for conducting a broader review of existing regulations, including tax regulations beyond those addressed in this notice. In a Request for Information published on June 14, 2017 (82 F.R. 27217), Treasury invited public comment concerning regulations that should be modified or eliminated in order to reduce unnecessary burdens. Comments in response to the Request for Information are due by July 31, 2017. In addition, in Notice 2017–28, Treasury and the IRS invited public comment on recommendations for the 2017–2018 Priority Guidance Plan for tax guidance, including recommendations relating to Executive Order 13777. Taxpayers may submit recommendations for tax guidance at any time during the year.
 Executive Order 13789 § 2(a) (2017).
 Id. § 2(b).
 This number excludes the following Federal Register documents: (1) corrections to proposed, temporary, or final regulations; (2) notices of proposed rulemaking cross-referencing temporary regulations required pursuant to 26 U.S.C. § 7805(e)(1); (3) notices of proposed rulemaking issued on or after January 1, 2016, for which a subsequent final rule was issued on or before April 21, 2017; (4) notices relating to public hearings; (5) notices withdrawing prior notices of proposed rulemaking; and (6) non-tax regulations jointly issued by the IRS and other Departments of the Federal Government.
 See https://www.treasury.gov/resource-center/tax-policy/Pages/Executive-Orders.aspx for a list of the regulations that were reviewed.
 See Executive Order 12866 § 3(f) (1993) (defining “significant regulatory action” to include, inter alia, “any regulatory action that is likely to result in a rule that may . . . [r]aise novel . . . policy issues arising out of . . . the President’s priorities”). To assess “undue financial burden,” Treasury considered the degree to which the regulation at issue imposed compliance costs or resulted in tax liabilities that exceed the minimum required to achieve the relevant statutory objectives. To assess “undue complexity,” Treasury considered the extent to which the regulation at issue imposed new substantive, computational, or other requirements not required to achieve the relevant statutory objectives, or introduced rules that added uncertainty for taxpayers.
10 Tips on How to Respond to a Bar Complaint (and How Not to Respond)
by Joseph Corsmeier
After nearly 28 years as a both a Bar discipline prosecutor and also assisting lawyers in defending Bar complaints (among other things), the following are my observations and tips regarding responses to Bar complaints, if the lawyer receives one.
- Do not ignore the complaint. One of the worst mistakes a lawyer can make is to ignore the complaint and hope that it will go away on its own, even if it seems frivolous and baseless to the lawyer.
- Do not procrastinate and file a timely response. The failure to timely file a response is a separate Bar Rule violation in Florida and other states. If the lawyer misses the deadline (and does not have a valid reason), there will be an additional Bar rule violation that may or will survive even if the original complaint is later dismissed.
- Do not contact the complainant about the complaint. As a general rule, it is not productive to contact the complainant after the complaint is received, particularly if it is the client. If the client is still a client of the firm, the lawyer must decide whether to withdraw from the representation.
- Conduct a thorough investigation. The lawyer should treat the complaint as he or she would treat a claim against an important client and investigate all facts and circumstances. The investigation should include gathering and preserving all relevant paper and electronic documents, preparing summaries and chronologies, obtaining witness statements (if applicable), and researching applicable rules and law. Do not rely only on your memory.
- Be sure that the response is complete. The Bar will consider the written complaint, the written response, and potentially evidence that is independently obtained by the Bar and/or its investigators. It is important to provide a clear, complete, and persuasive written response which addresses every allegation in the complaint; however, do not “open Pandora’s box” by going beyond the issues/ allegations in the complaint.
- The Bar is not your enemy. The lawyer should fully cooperate with the Bar and its investigators to assist in reaching the correct conclusion (dismissal of the complaint, of course) by stating the facts, organizing the evidence, and answering and follow up requests promptly.
- Do not attack the client or the Bar. Unless there is a direct link between the client’s misconduct and the alleged violation and/or false statements/ credibility issues, attacks on the client may or will reflect poorly on the lawyer and will often cause the lawyer to lose credibility with the Bar. The issue is whether the Bar rules were violated, not whether the client is a bad person. The lawyer should also not attack the Bar counsel, judges, opposing counsel or the discipline system in general.
- Do not lie. It probably should go without saying that the lawyer must not intentionally misstate the facts. Not only is this wrong and counterproductive, but the lawyer can then be charged with lying in response to the complaint, which is a separate Bar rule violation. It also goes without saying that a lawyer should not alter, backdate or improperly reconstruct documents.
- Do not overreact. The lawyer must remember that a Bar complaint is merely a complaint, not a finding of any rule violations. The lawyer will not help him or herself, law partners or other clients by agonizing over the matter and/ or becoming paralyzed. If the lawyer is depressed or is addicted or engaged in substance abuse (whether due to a complaint or for other reason), assistance is available through Florida Lawyer’s Assistance, Inc.
- Consider retaining Bar discipline defense counsel. Some lawyers decide to respond to a Bar complaint pro se; however, in most cases, however, the lawyer should consider hiring experienced Bar defense counsel who can bring perspective, expertise, and familiarity with the ethics rules and disciplinary procedures. The lawyer should consider what is at stake as well as the value of his or her own time. There is certainly a legitimate basis for the cliché that “a person who represents himself has a fool for a client”. Be careful out there.
Joseph A. Corsmeier is a Martindale-Hubbell “AV” rated attorney who practices in Clearwater, Florida. His practice consists primarily of the defense of attorneys and licensed professionals in disciplinary and admission matters, and expert analysis and opinion and court testimony on ethics and liability issues. Mr. Corsmeier is available to provide attorney ethics and professionalism advice, provide expert opinions on ethics and malpractice issues, assist attorneys to insure compliance with the Florida Bar Rules, and defend applicants before the Florida Board of Bar Examiners.
An Approach to Medical Compliance
by Pariksith Singh, MD
Compliance is a complex subject. Perhaps the most difficult to master in Health Care Management, if it can ever be mastered. In our organization, we brought in compliance across the company almost 12 years ago to ensure appropriate documentation, proper coding and billing, adherence to federal and state statutes, ensuring employee and patient safety and creating an equal opportunity workplace environment for all. And I can say with confidence that we have come a long way since we started. A culture of compliance has been created. And yet, every day we find new problems, new issues that missed our ken.
If I can describe the whole gamut of compliance in one word, it would be ‘integrity’. Integrity of systems, of people, of processes, of thought, of feeling, of behavior and etiquette, of everything that we do, day in and day out. It starts with creating an atmosphere where doing the right thing is always accepted, nay applauded. Where the only fear is of hiding one’s mistakes. This integrity is not only individual but at an organizational level. Creating it and enforcing it, drilling it into our DNA is a constant process. Eventually, it should become natural and reflexive.
How to create a culture and an organization of compliance? Where the benchmark is openness and honesty and errors are fixed as soon as they are recognized without any attempt at concealing. To my mind, it starts from the top, the leadership. Those at the helm of the organization have to accept it whole-heartedly and live it, no matter the cost. It is only then, that it can flow down the rungs of the company.
The other most critical part of this transformation would be to hire a strong compliance office, someone with experience in the field, native intelligence, passion and willingness to learn constantly. Someone who is strong enough to stand up to errant folk but also someone who can empathize and explain arcane matters in an easy to understand manner. Someone who is relatively independent and yet focused on the whole team and its attempt to excel.
Eventually, the compliance officer (CO) needs to be free of the constraints of the normal hierarchy of the organization. He or she should report directly to the Board of Directors and the Chief Executive Officer and not to anyone else. This would allow for the CO’s autonomy and ability to give direct and unadulterated feedback at the highest level.
The culture of the organization also has to be focused on learning and knowledge-sharing. Regulations are changing constantly and the key decision-makers in the organization need to be aware of the changes. Compliance is sufficiently vast and complex to expect a hundred percent mastery over the subject in the company. The only way this problem can be addressed is to hire the best consultants in the business and ensure that there is constant learning among all echelons of the leadership.
Proper systems and processes are needed. Continuous training and reviews of all personnel is the sine qua non. Reporting and data collection have to be real-time and regular. Transparency of business intelligence and cognitive technology should be developed.
A strong compliance program will deal with a variety of issues, including federal and state statutes, employee and occupational laws, medical and legal concerns and risk-management and communication issues. The organization has no choice but to become proficient in handling any and all issues that may come up on a daily basis. Not following the standard operating procedures is dangerous and should be completely avoided.
A robust compliance program is a long-term investment, trading short-term pain for long-term safety and success. It takes tremendous resources and effort to develop and many years in the making. A predictive, proactive and preventive mind-set is of utmost importance and constant vigil and willingness to comply are the pillars of its proper execution.
If the Banks Start to Fail Again-Will Your Clients’ Accounts & CDs Be Safe? (Part 2 of 2)
by Ken Crotty, Alan Gassman & Chris Denicolo
with Review by Taylor Binder & Joseph DiNuzzo
The Thursday Report asked FDIC Insurance Specialists Tayler Binder and Joseph A. DiNuzzo to review our 2008 article of the title below.
Taylor and Joseph work for Promontory Interfinancial Network, LLC , which provides CDARS and ICS services to thousands of banks and other financial institutions as the leader in the FDIC Insured Deposit Allocation Services area.
Many clients and advisors are not aware that banks who belong to the CDARS program (CDARS stands for Certificate of Deposit Account Registry Service) can open accounts well above $250,000 that will be FDIC insured through the cooperative arrangement between hundreds of banks that can participate pro-rata to enable such coverage.
Please enjoy this updated explanation of planning issues and alternatives for clients who want to be assured that their bank accounts qualify for FDIC coverage.
PROTECTING YOUR ACCOUNTS FROM BANK FAILURE:
Opportunity and Complexity Presented by
Federal Deposit Insurance Corporation Regulations
By Kenneth J. Crotty, Esquire; Alan S. Gassman, Esquire; and Christopher J. Denicolo, Esquire, Gassman, Crotty & Denicolo, P.A.; Taylor Binder and Joseph A. DiNuzzo, Esquire, of Promontory Interfinancial Network, LLC
Corporation, Partnership, and Unincorporated Association Accounts
Corporation, partnership, and unincorporated association accounts, whether for profit or not for profit, are all insured under the same ownership category. To qualify for this coverage, the entity in question must engage in an “independent activity.” The FDIC defines “independent activity” as being operated for some purpose other than to increase insurance coverage. However, the rules are unclear as to whether multiple entities, which each engage in an independent activity, that are established by common ownership and classified as disregarded entities for federal income tax purposes receive the benefit of the $250,000 per entity FDIC coverage. This issue is discussed below in the “Additional Complexities” section.
Any deposits made by any of these entities are insured up to $250,000 at a single bank and are insured separately from the personal accounts of any officers, directors, shareholders, members, partners, or the like. If accounts are owned by the same entity but labeled for different purposes, the accounts are not separately insured. Instead, the total deposits for each of these accounts are combined and insured to a limit of $250,000. This rule extends to any possible divisions or units that are not separately incorporated.
FDIC covers a maximum of $250,000 for the deposits of any one business entity, notwithstanding how many members the entity has. It is important to note that sole proprietorships are not covered by this rule. Instead, any deposits owned by a sole proprietorship are added to any of the owner’s individual accounts, and the total is insured up to $250,000.
Acting as an agent for a customer, a bank can place funds in increments of less than $250,000 at multiple banks. Utilizing pass-through coverage, FDIC-insured deposit allocation services allow a bank to offer access to FDIC insurance that is above the FDIC maximum of $250,000. Pass-through coverage is conditioned on three procedural requirements:
- The account title must indicate that the account is held by an agent;
- The agent’s records (or the bank’s or a third party’s records) must show the ownership interest of each owner in the account; and
- The account funds must not be owned by the agent and must actually be owned by the parties for whom the agent is acting. It is important to note that the agent/custodian must not assume the role of debtor. Pass-through coverage is not available in that situation and is of serious concern to the FDIC (FDIC FIL 29-2010).
Co-authors Taylor Binder and Joseph A. DiNuzzo work for Promontory Interfinancial Network, LLC, which provides local community banks with the ability to offer access to extended FDIC insurance into the multimillions of dollars.
Joseph A. DiNuzzo was a former FDIC attorney who specializes in deposit insurance coverage, and was involved with writing the FDIC Deposit Insurance Regulations that can be found at 12 CFR Part 330.
CDARS – CDARS® – or the Certificate of Deposit Account Registry Service® – is the most convenient way to access FDIC insurance on multi-million-dollar CD deposits and to earn CD-level rates, which often compare favorably to Treasuries and money market mutual funds. With CDARS, a depositor can access FDIC insurance into the multimillions through one bank relationship, while receiving one rate for each CD maturity and one regular, consolidated statement. CDs placed through CDARS are an excellent alternative to collateralization (which comes with recurring tracking burdens) and to managing multiple bank relationships, agreements, and statements on an ongoing basis.
ICS®, or the Insured Cash Sweep® service, is a cash-management tool that provides a depositor with access to multi-million-dollar FDIC insurance on large deposits. The Insured Cash Sweep service is an excellent cash-management alternative to repurchase agreements, money market mutual funds, and other traditional vehicles where finance professionals and/or individuals place excess cash. Individuals, CFOs, treasurers, and other cash managers can use ICS to enjoy peace of mind, access funds either up to 6 times per month (using ICS savings option where funds are placed into money market deposit accounts) or unlimited times per month (using ICS demand option where funds are placed into demand deposit accounts).
There are several specific situations which present complex and unclear guidance in determining FDIC coverage.
Must You Use the 6-Month Grace Period?
After the death of an owner, the FDIC permits a 6-month grace period in which the owner is considered alive for the purpose of calculating insurance coverage. In situations where the owner of a revocable trust dies and the trust consequently splits into irrevocable credit shelter and marital trusts, the 6-month grace period applies to continue the pre-death amount of FDIC coverage. However, if the amount of FDIC coverage available when the trusts split and become irrevocable is greater than that available when the trust is considered as continued to be revocable, the issue arises of whether the 6 month grace period is mandatory. According to the regulations, “the death of a deposit owner shall not affect the insurance coverage of the deposit for a period of six months following the owner’s death unless the deposit account is restructured.” Therefore, it appears that if the account held under the revocable trust is retitled to reflect ownership under each of the irrevocable trusts, then the amount of FDIC coverage that exists will change accordingly to reflect the actual ownership of the accounts. This conclusion is further supported by the regulations stating that the operation of the grace period shall not result in a reduction of coverage.
What about Credit Shelter and Marital Trusts after the Grantor’s Death?
Uncertainty also exists where a grantor creates a revocable trust that splits into a credit shelter trust and a marital trust upon the death of the grantor. Although irrevocable trusts that spring from a revocable trust upon the death of the owner are insured under the revocable trust rules while the trust remains revocable, it is unclear as to what the coverage would be once the revocable trust splits into the credit shelter trust and marital trust. Although there is no formal guidance addressing this issue, it appears that the rules governing revocable trusts would apply before the trust splits into the irrevocable credit shelter and marital trusts upon the death of the grantor. Once the trust splits into the two irrevocable trusts (and after the earlier of the 6-month post-death grace period or the restructuring of the account), the irrevocable trust rules appear to apply. Therefore, coverage for the interests of remainder beneficiaries depends on whether the remainder beneficiaries’ interests are contingent.
If the trust provides that a trustee of the credit shelter or marital trust may invade the principal of the trust and, as a result, the remainder interest of the other beneficiaries may be reduced or eliminated, the remainder beneficiaries of the trust which affords this power to the trustee will not qualify for protection. In addition, the beneficiaries of such trust will not qualify for protection if the trust agreement states that a beneficiary needs to meet certain conditions to receive assets or if the trust agreement provides that the trustee may allocate the assets among the beneficiaries in unequal shares.
What Effect Does a Power of Appointment Have on Coverage?
Another issue exists where a life income interest beneficiary has a power of appointment over the remainder of trust assets. Although there is no specific guidance on this issue, it is likely that a power of appointment will cause potential remainder beneficiaries to be contingent beneficiaries for the purposes of receiving FDIC insurance coverage on a per-beneficiary basis. This is because as a potential appointee of trust property by a power of appointment, the beneficiaries do not have a vested interest that is named or identified in the trust agreement. Also, under this scenario, the fact that a beneficiary will not receive trust assets unless the property is appointed to him or her will likely be construed as a condition that is necessary to be satisfied for the beneficiary to receive any trust assets. Moreover, the existence of a power of appointment could cause trust assets to be diverted away from a particular beneficiary; thus, such beneficiary interest will likely be seen as contingent where a power of appointment could possibly cause such beneficiary’s interest to be reduced or increased.
If There Is More Than One Irrevocable Trust Account for the Same Beneficiary, Which One Has Priority?
As a periphery to the above discussion, another situation that creates confusion occurs where the surviving spouse has a life income interest in both the credit shelter trust and the marital trust after the death of the grantor. Because FDIC coverage is limited to $250,000 per non-contingent irrevocable trust beneficiary per grantor, if the aggregate value of the surviving spouse’s life income interests exceeds $250,000, then a portion (or both) of the surviving spouse’s income interests will not be covered.
For example, if the value of the surviving spouse’s life income interest in the credit shelter trust and marital trust are each equal to $250,000, then only $250,000 of the $500,000 of total assets is covered. However, no guidance exists as to which of the two life income interests in this case would have priority in receiving insurance coverage. It seems that the credit shelter trust should receive the first available coverage because the credit shelter trust is usually funded before the marital trust. This is because of the nature of the marital trust as the usual recipient of funds remaining after the credit shelter trust. Furthermore, if, in the above example, all of the assets held under both trusts are lost due to bank failure, it is preferable to have the available FDIC insurance coverage apply to the credit shelter trust because of the fact that the credit shelter trust will pass to the next generation free of estate tax upon the surviving spouse’s death.
What Is an “Independent Activity”?
In the context of accounts held by corporations, partnerships, and unincorporated associations, each such organization has up to $250,000 of FDIC coverage for all accounts owned by the organization. Separate entities each are afforded this $250,000 of coverage, provided that each organization engages in an “independent activity.” This phrase is interpreted by the FDIC as being operated for some purpose other than to increase insurance coverage.
Despite this general guidance, there seems to be uncertainty where separate entities that are disregarded for income tax purposes are owned by the same individual or entity. In this case, it is unclear whether the FDIC would honor $250,000 of coverage for each of the disregarded entities if each entity had a legitimate purpose other than obtaining FDIC insurance coverage. Because of the broad language used to define “independent activity,” it is likely that separate FDIC coverage would apply to each entity in this situation. However, this conclusion is subject to the FDIC’s interpretation, which may be in favor of providing coverage but is nevertheless uncertain.
Conscientious advisors who wish to advise their clients on the FDIC coverage rules to maximize bank account deposits will have to spend time analyzing and understanding the situation of the client and the complex regulations involved.
For guidance in addressing uncertain or complex situations, the planner can visit www.fdic.gov/edie. This site contains a calculator where a planner may insert information, including deposit accounts held at FDIC-insured banks, current balances, and names of each owner and beneficiary, to calculate a client’s particular FDIC coverage. In addition, individuals or practitioners may contact the FDIC at 1-877-275-3342 to obtain more information regarding the coverage provided for accounts held by living trusts, irrevocable trusts, entities, or other account owners.
Richard Connolly’s World
Insurance advisor Richard Connolly of Ward & Connolly in Columbus, Ohio often shares pertinent articles found in well-known publications such as The Wall Street Journal, Barron’s, and The New York Times. Each issue, we feature some of Richard’s recommendations with links to the articles.
This week, the article of interest is A Judge Wants a Bigger Role for Female Lawyers. So He Made a Rule by Alan Feuer. This article was featured on August 23, 2017 in The New York Times
Richard’s description is as follows:
It is common for judges to publish guidance for lawyers who appear in their courtrooms on how to conduct themselves with regard to minor matters like how and when to file motions. But on Wednesday, Jack B. Weinstein, a senior federal judge in Brooklyn, used this typically mundane process to address an issue of growing concern to many in the legal profession: the lack of female lawyers in leading roles at trials and other court proceedings.
Following the lead of a handful of other federal judges, Judge Weinstein issued a court rule urging a more visible and substantive role for young female lawyers working on cases he is hearing.
To View the Full Article Click Here
Power of Appointment Limitation Provisions
By Alan Gassman
Have you ever considered that beneficiaries holding the ability to direct how assets pass on their death may not understand how tax, trust, creditor, and divorce law work in the real world, thereby exposing future generations to loss of Trust assets.
Why not require the exercise of a Power of Appointment to be conditioned upon an in-person consultation with a qualified lawyer?
The following language can be considered for this:
[FROM SECTION 5.01]
(2) Each Primary Beneficiary of a separate trust created hereunder shall have a limited Power of Appointment (as defined in Section 1.09 of this Trust Agreement) with respect to the property remaining in such separate trust upon the beneficiary’s death, either outright or in trust, and in such proportions as the beneficiary may choose, among the lineal descendants of the Grantor (other than the power holder), provided that this restriction to the lineal descendants of the Grantor shall not apply if there are no descendants of the Grantor other than the power holder then surviving. This power of appointment shall be a limited power of appointment, and the beneficiary shall be prohibited from appointing the property to the Grantor, to himself or herself, to his or her estate, to his or her creditors, or to the creditors of his or her estate, provided that there will be a power to appoint to the creditors of the estate of a Primary Beneficiary to the extent necessary to prevent federal generation skipping tax from being imposed on this Trust or any assets under this Trust at any time. The power shall be exercised, if at all, by a specific reference in the beneficiary’s Last Will and Testament duly admitted to probate by a court of competent jurisdiction which shall refer to this Trust Agreement. Notwithstanding the above, and in order to assure that the Primary Beneficiary has been properly counseled with respect to the advantages of keeping assets under trust for future generations, such power shall not be exercisable unless such Primary Beneficiary shall meet physically to confer with a lawyer who is Board Certified in trust and estates, taxation, or elder law, and has at least ten (10) years’ experience to discuss the advantages of maintaining assets under trusts to facilitate protection of beneficiaries from creditors, divorce, estate taxes, and improvidence, and no exercise of such power shall be considered to have occurred unless such qualified lawyer signs a letter contemporaneously with the execution thereof to confirm that the execution follows a consultation with such lawyer which provided input and advice with respect thereto.
[FROM SECTION 6.03]
Further, at any age as an adult, such Primary Beneficiary shall have the power to designate the successor Trusteeship to take effect upon the death of the Primary Beneficiary of such separate trust or any trusts created therefrom, by a signed writing delivered to the Trustee then serving or by specific reference to this power in the Primary Beneficiary’s Last Will and Testament, provided that in order to be able to exercise such power, such Primary Beneficiary shall meet physically to confer with a lawyer who is Board Certified in trust and estates, taxation, or elder law, and has at least ten (10) years’ experience to discuss the advantages of maintaining assets under trusts to facilitate protection of beneficiaries from creditors, divorce, estate taxes, and improvidence, and without such consultation, as evidenced by a letter from such lawyer confirming that the consultation occurred and that the above was discussed, no such exercise of the power to designate the successor Trusteeship shall have any force or effect.