Using Your Tax Refund Wisely

As 2012 draws to a close many of us are looking forward to getting a tax refund for the year.  Many have already decided how to spend it, some have already spent it five or six ways in their mind.  As you look forward to 2013, now is a good time to think hard and realistically about that refund.  Here are some things to bear in mind.

1.  If your refund is over $2,000, you are having too much withheld.  A refund is exactly what it says, a giving back to you some of your own money.  By getting a large refund you have made the IRS an interest free loan during 2012.  Look at it this way: a $6,000 refund means you had $500 per month too much withheld from your pay.  What would that extra $500 a month have done for you?  Now is a good time to use one of the calculators you can find on the IRS website (www.irs.gov) to see how much you should have withheld.

2.  Pay down high interest debt, especially any payday loans you might have.  High interest debt hurts in several ways.  First there is the actual monetary cost of the debt.  Then there is the emotional cost of worrying about making payments.  Finally there is potential risk to your credit score or even the chance of defaulting.

3.  Build up your emergency fund.  Ideally you should have enough money set aside for three to six months' worth of normal living expenses (including your house payment).

4.  Beef up your IRA or 401(k).  Check with your plan administrator about the maximum contributions and if you haven't reached those, consider using some of your refund to add to your retirement account.

5.  Save for something you have wanted.  Maybe it's a new house or a new car or some renovations to your home such as new carpet.  Your refund can jump start your ability to reach that goal.

Defamation Lawsuits to Rise?

The growing number of websites such as Yelp and Angie's List, where consumers can post reviews of local businesses, may have the effect of increasing the number of defamation lawsuits that are filed.  Defamation includes the similar torts of libel and slander.  Historically, libel was defamation in written form while slander was oral defamation.  Both involve publishing (whether by word or mouth) false or misleading statements about another.

Defamation lawsuits in the United States are fairly uncommon due to the First Amendment, which guarantees freedom of speech.  In Great Britain, libel and slander suits are much more common.  But the growing use of the Internet, the prospective reach of the Internet and the relative anonymity of the Internet are all pointing to signs in a rise of such suits.  Here's how it works:  A consumer gets what she feels is shoddy service from a local business.  Instead of complaining directly to the business (or perhaps after doing so without getting satisfaction) she posts a scathing review on one of the websites devoted to that or to her Facebook page.  The fact that she can do so from her own home without immediately being subjected to any contrary feedback might prompt her to embellish the "facts" a bit.  The shoddy workmanship might become an intentional attempt to rip her off.  The business might be described as crooked.  All of a sudden her rant gets spread to hundreds or thousands of readers.

Businesses, who rely on word of mouth and reputation, are becoming pro-active in attempting to squelch negative images.  For example, a Chicago plastic surgeon sued when a former patient accused him of giving her "Frankenstein breasts."  The woman might suddenly find herself a defendant in a defamation suit.  While it's true that truth is an absolute defense, that vindication might come only after the expenditure of thousands of dollars in legal fees.  And there are cases of consumers losing.  A California technology company was awarded $1.5 million against a blogger who accused the firm of cheating associates.  A Florida woman won an $11.3 million verdict over claims she was a "crook" and a "con artist."

Before you hit the "publish" button, stop and think what the effect of your rant might be.

Beware the Purchase Money Security Interest

When filing bankruptcy, or any time you're buying on credit, beware of the Purchase Money Security Interest (PMSI).  A PMSI gives the seller of the goods a security interest in whatever you purchase.  This is especially sneaky when you use an in-store credit card, such as one issued by Best Buy, Sears or, in the Salt Lake City area, R.C. Willey.  When you applied for credit with these companies the credit application you signed says that you grant a PMSI in whatever you buy using the card.  This extends to EVERYTHING you buy, even if you bought it five years ago and think you long ago paid that purchase off.  If you still owe money on the card, those items are probably collateral for the debt.

Suppose that last Christmas you used your Best Buy card and purchased a laptop and an iPod.  You kept the laptop but you gave the iPod as a gift.  Now you find you have to file bankruptcy and you list Best Buy as a creditor.  Everything seems fine until a representative of Best Buy calls and asks if you intend to reaffirm their debt.  It's a credit card, you say.  I'm not reaffirming with VISA or Master Card, why would I reaffirm with them?

The simple answer is the PMSI.  As a secured creditor Best Buy is entitled either to be paid the value of what you want to keep or have the merchandise returned.  You probably don't want to go to whomever you gave the iPod to and ask for it back so you have no choice but to pay for it.  Reaffirmation is a negotiated agreement between debtor and creditor and a creditor doesn't have to reaffirm, so if Best Buy demands that you reaffirm the entire debt if you want to keep the iPod you might have to pay the entire debt, even though you'd be happy to give back the laptop.

The reason you don't have to reaffirm with VISA or Master Card is that they are unsecured creditors.  They did not get a PMSI in whatever you bought using the card so they have no right to demand anything back.

Miley Cyrus Hopes to Avoid Achy-Breaky Heart

Miley Cyrus and fiance Liam Hemsworth are reportedly working on a pre-nuptial agreement in case their planned marriage should fall apart.  Cyrus is reportedly worth $130 million, while Hunger Games' Hemsworth is only worth a paltry $20 million.  But there's more.  Cyrus is said to be equally concerned about the possible fate of the couple's six dogs in the event of dissolution of the marriage.

It isn't clear where the couple is getting married.  Hemsworth is from Australia; some reports indicate a wedding in England.  If so, a pre-nup might not be binding.  In England a pre-nuptial agreement does not carry the same force it does in the United States.  Rather than being considered as a binding contract it is merely one of several factors that a court can consider.

Avoid this Year-End IRA Trap

Because the Individual Retirement Account (IRA) was created as part of the Internal Revenue Code, there is  nothing simple about the way it works.  There are a number of traps that can end up hurting you if you're not careful.

One of this is failing to take a Required Minimum Distribution (RMD) every year after you turn 70-1/2.  The RMD is first due by April 1 of the year after the year in which you turn 70-1/2.  Once RMDs begin they must be taken every year by December 31.  If an RMD isn't made, or is made in an amount less than the RMD required, the IRS imposes a 50% penalty on the shortage.  The amount of the RMD is determined by dividing the IRA balance as of December 31 of the prior year (after that year's RMD) by one of three life expectancy factors.  Be sure you use the right one!

Here's how it would work for an 85-year old whose IRA balance is $900,000 as of December 31, 2011:  Using the life expectancy factor of 14.8, the RMD for 2012 would be $60,811 ($900,000/14.8).  If this person failed to take any RMD the IRS would impose a penalty of 50% of $60,811, or $30,405.50.  If the person took a distribution of $50,000, the penalty would be 50% of $10,811 (the shortage), or $5,405.50.  Of course, you can take more than the RMD without penalty; you just have to take the minimum each year.

If you have more than one IRA the RMD is calculated on the total of all IRAs and can be taken from any or all of them.  So if the person in the above example had two IRAs, one of $500,000 and one of $400,000, he could take the distribution equally from both, all from one or the other, proportionally from each or however he wants.  One thing he should do is re-balance the account from which the distribution is made after he takes it.

With the year end approaching watch out for tax traps.

Your Own Fiscal Cliff

We're hearing a lot lately about the fiscal cliff that the country is about to plunge over if Congress doesn't act before December 31.  Many people might be facing their own fiscal cliffs with the coming holiday season.  This is a time for giving but don't get carried away by all the marketing hype.  If your finances are precarious, this is not the time to throw caution to the winds and spend recklessly.

Some may have the idea that they can run up a large credit card bill, have a great holiday season and then declare bankruptcy.  That would be possibly the worst thing you could do from a financial standpoint.  Creditors look closely at expenditures just before a person files bankruptcy with an eye to objecting to the discharge on the grounds that the debt was fraudulently incurred.  A debt is fraudulently incurred if, among other things, the debtor knew or should have known that she couldn't pay the debt at the time it is incurred.  Filing right after running up a big credit card debt, especially for non-necessities such as gifts, movies, dining or luxury items is an indication that the person knew she wouldn't be able to pay those debts.

Even worse, the United States Trustee might look into the case and decide to challenge the entire bankruptcy as opposed to a single debt.  Or, in the worst case scenario, the Trustee refers the case to the Department of Justice for possible prosecution as bankruptcy fraud.  That's a federal crime punishable by imprisonment.

Remember that bankruptcy is intended for the honest debtor who simply can't make ends meet.  It isn't meant as a way of letting someone have their cake and eat it too.  This holiday season make sure to use your common sense before you use your credit cards.

Post Election Uncertainty

The great election of 2012 is now history and President Obama will serve another four years.  In response to  his re-election the NYSE dropped to its lowest point in a year.  That's probably the best indication that business doesn't favor what the future might hold under a second Obama administration.

One issue that has been waiting for resolution until after the election is the estate and gift tax.  The Bush era tax cuts are set to expire at the end of the year, reverting the estate and gift tax exemption to $1,000,000 from its current $5+ million.  If that should happen (and that's a big IF), a lot of families could get caught with an unexpected estate tax.  Five million is a lot of money in an estate, but one million, even with today's depressed real estate values, is not that uncommon.

There's no clear-cut answer.  President Obama has said he's in favor of allowing the tax cuts to expire. Does that mean he would veto an extension if passed by Congress?  Give that the House is under Republican control while the Senate is under the Democrats, will Congress even work together to pass a bill in time to present to the president?  Most advisers are saying to use your exemption while it exists if you would have an estate tax issue under a reduced, $1,000,000, exemption.  If you fall in that category, or even think you might, talk to a qualified estate planning attorney.

Does Your Pet Need a Trust?

An article in today's online Wall Street Journal addresses the question whether you should set up a trust for your pet.  At first glance that may seem like a preposterous idea.  But think about it.  Many pets are practically family members.  A pet is property, and will be treated as such in the eyes of the law, meaning if there is no one to care for it, it could be treated as abandoned property.  That could result in the pet being sent to the pound or even euthanized.

Since a pet isn't a human, it can't receive an outright bequest of money.  If you want to leave money to your pet you will need to establish a trust and appoint a trustee.  The trust should give direction to the trustee how to care for the pet and specify how much money is being left to the trust for the benefit of the pet.  You might also want to make a "no contest" clause in your will.  That clause deletes an heir's share if that heir challenges the will.  Such a clause could discourage one of the human heirs from challenging grandma's bequest of her estate to her cat.

"Conscious Presence" in Witnessing a Will

In law school we learned that when someone witnesses another person execute a will, the witness has to be in the "conscious presence" of the signer.  We read cases about whether being in another room counts if the witness can see the signer as he or she signs the will.  Of course way back then no one could possibly imagine video conferencing.

Now that millions of people have Skype sessions routinely the question is bound to come up: if the witnesses are in a room thousands of miles from the signer of the will, but they are connected by video conference technology and can see and hear each other in real time, does that qualify as being in the conscious presence of each other so as to make the will signing legitimate?  The Court of Appeals in Ohio recently had this question before it in Whitacre v. Crowe  ( http://www.sconet.state.oh.us/rod/docs/pdf/9/2012/2012-ohio-2981.pdf).  The court concluded that under the Ohio definition of "conscious presence" video conferencing while signing a will was not permitted and invalidated the will.

The result was that the will, which had excluded three of the decedent's five children and named one of the remaining two as executor and the other as sole beneficiary, was revoked from probate, meaning the decedent died without a will.  In that case, the general laws of intestacy would go into effect.  Presumably the result would be that the five children will share equally in the estate, which is probably the reason for the lawsuit in the first place.

401(k) Contributions in Chapter 13

One question many people ask is, "can I continue to contribute to a 401(k) plan in Chapter 13."  The answer depends on where you live.  Depending on which federal judicial circuit you live in, contributions to a 401(k) might be allowed or they might not.  Utah is in the Tenth Judicial Circuit.  In the Tenth Circuit ongoing contributions to retirement accounts are not considered necessary living expenses and are therefore not allowed in Chapter 13.  In other words, the amount ordinarily contributed to a 401(k) plan must be diverted to the trustee for the benefit of creditors while one is in Chapter 13.

Separate from ongoing contributions is the question of whether loans from a 401(k) can continue to be repaid in Chapter 13.  In this case, courts are fairly unanimous in holding that repayment of existing loans as opposed to contributions is permissible in Chapter 13.

Disinheriting Someone

Occasionally it happens that a parent wishes to cut off a child from any inheritance.  Rarely one spouse wants to exclude the other.  The question arises, can that be done?

The answer is "yes" if the heir is a child or anyone besides a spouse.  In Utah a spouse is entitled to what he or she would receive if the decedent died intestate (without a will) even if the will says the spouse is to receive nothing.  This is called the spouse's elective share.  When it comes to anyone besides a surviving spouse a person is entitled to include or exclude whomever she sees fit.

Before deciding to exclude someone from a will, it's important to think through the reasons for wanting to do this.  Usually the person disappointed the decedent in some way, such as by dropping out of school, marrying the "wrong" person, becoming involved in drugs, crime or some other illegal or immoral activity.  Then think about the legacy you as the maker of the will that excludes this person will leave.  How will you be remembered by this person and any others who learn of the decision to exclude that person?  Is that a legacy you want to leave?

Distributing one's estate shouldn't be about rewarding or punishing anyone.  It's about giving away what you can't take with you.  You have no use for anything after you're dead; why should you care particularly who receives it or what they do with it?

Walk Away

One of the hardest things for many bankruptcy clients to do is just walk away from their house or car.  People form emotional attachments to both houses and cars, especially the former.  It's the place where the kids grew up, where there were good times and bad, the place that was always refuge from the storm.  But in bankruptcy the house might not be refuge; it might well be the cause of the storm.

The current economy has put a lot of homeowners under water with their mortgages, to where some owe twice as much as the house is worth.  Look at it objectively:  If you were buying a house, would you pay twice as much as it is worth?  But that's exactly what some people do when they reaffirm on the mortgage debt.

If you're filing bankruptcy and looking for a fresh start, look first at your mortgage.  The sensible thing might be just to walk away.

So You Want to Stay in Business With Your Ex-Spouse

It should seem obvious that if two people can't get along as husband and wife they can't get along as business partners.  Yet a recent case from New Jersey addressed the situation of former spouses who tried (and failed) to maintain their business relationship post-divorce.  In Mariello v. Mariello (http://www.judiciary.state.nj.us/opinions/a4044-10.pdf) the New Jersey Appellate Court held that a property settlement agreement (PSA) between the parties as part of the divorce was binding and the ex-wife, who became unhappy over how the rental properties were being managed, was not entitled to the usual remedy available to joint owners, that of partition.  Partition means the court equitably divides the property.  Here the appellate court found that the PSA had addressed the issue of partition and the parties had agreed not to partition in the event of a dispute.  The moral of the story is, be very careful about staying in business with an ex-spouse.

How Are Your Assets Titled?

When it comes to estate planning, how something is owned, i.e. how the title reads, is almost as important as what is owned.  Many people own property as joint tenants so that either of them can deal with the property.  This makes good sense from an administrative standpoint, but not necessarily from an estate planning standpoint.  Property held in joint tenancy automatically passes to the other joint tenant or tenants upon the death of one of the joint tenants.  This might or might not be what the parties had in mind.  For example, suppose Mom transfers her bank accounts into her and her sister's names so the sister can help Mom, who is getting older, deal with her bills.  Mom has a will that says that on her death the money will go to her children.  But when she dies the joint tenancy automatically transfers the accounts into the sister's name, regardless of what the will says.  If the sister wants to force the issue, the kids might be out of luck.

When planning your estate, always be aware of how your property is titled. 

Posthumously Conceived Children Can't Necessarily Get Social Security Benefits

The Supreme Court of the United States has just announced a fascinating decision.  In a unanimous opinion the Court sided with the Social Security Administration in holding that a child conceived posthumously (after the father's death), such as by way of preserved sperm, is not automatically entitled to Social Security benefits as a surviving heir unless the child is entitled to inherit from the father under state intestacy or inheritance law.  Simply put, such a child cannot rely solely on the fact that it is the genetic offspring of the father.  The child's right to receive benefits depends on whether state law would recognize the child as the father's child.  Since most state intestacy laws were enacted well before medical advances allowed for the preservation of the father's sperm and insemination of the mother by artificial means, this is an open question in most states that will require either legislative clarification or interpretation by each state's courts.

The case is Astrue v. Capato, docket number 11-159, opinion issued May 21, 2012.

Adult Adoptions

A Florida man, John Goodman, recently made news when it was announced that he intends to adopt his girlfriend, Heather Hutchins.  This prompted speculation that the move was designed to protect some of Goodman's fortune (he's a wealthy socialite in Florida) because in March he was found guilty of DUI manslaughter in the death of Scott Wilson in an automobile accident in which Mr. Goodman was driving under the influence of alcohol.  Wilson's family sued for damages.  The case has been dismissed, suggesting a settlement.

The question immediately comes to mind, can one adult adopt another and, if so, why?  The answer is yes, one adult can adopt another adult.  There are several reasons.  One of the most common is in the case of a remarriage where the new spouse has adult children.  Each spouse might wish to solidify the blended family by adopting each other's children, thus making one big, happy family.  Another reason is in states that do not recognize same-sex marriages, one member of the couple might adopt the other to give them both something similar to marriage under laws of inheritance and benefits such as health.

For a more detailed look at adult adoption, see this good post by the firm of Bryan Cave:
http://trustbryancave.com/girlfriends-come-and-go-but-daughters-are-forever-the-case-for-adult-adoption/#page=1

Two Common Bankruptcy Myths

There are a lot of myths surrounding bankruptcy, about what it can or can't do, who can file, who can't, that you can except certain debts, etc.  Two of the more pervasive myths are (1) that you need a minimum amount of debt in order to file and (2) that you have to repay all your debts in Chapter 13.  Both are false.

Anyone can file bankruptcy with any amount of debt.  In theory if you owe someone $25 you can file, though you'd probably be committed because the filing fee is $306.  But the truth is, there is no minimum amount of debt required.  Whether you file is a personal decision.  For some people, $5,000 is too much debt.  For others, $500,000 is not too much.  It all depends on the individual.

When it comes to Chapter 13, you do not have to repay all your debt.  It would be a foolish program if it required full repayment.  Think about it.  If someone can't repay their debts NOW, how are they going to be able to repay them in only 60 months, the maximum time allowed under Chapter 13?  What Chapter 13 does is look at what you can afford to pay and require you to pay that for the length of the plan, which is 36 or 60 months, depending on a number of factors.  At the end of the plan, any remaining debt is discharged, just like in a Chapter 7.  But Chapter 13 has advantages over Chapter 7:  There is no means test, which disqualifies some debtors from Chapter 7; you get to keep assets that you might otherwise lose in Chapter 7 (such as cars, houses, stocks, etc.); and some debts that can't be discharged in Chapter 7 can be discharged in Chapter 13.

JP Morgan Chase Shuts Down Collection Arm

An interesting article in American Banker just caught my eye.  JP Morgan Chase, one of the bigggest of the big guys, has quietly shut down most of its consumer collection activities.  As recently as mid-2011 this division was bringing in hundreds of millions of dollars a month in revenue for JPMC. Chase is mum about why it has stopped collection activities, but speculation is that it has something to do with similar problems faced by Chase, B of A and others in foreclosures:  Lack of documentation for the debts.

It looks like the bank that was too big to fail is now too big to manage.

Saving Your Business in Chapter 13

Most people think of Chapter 11 when they think of reorganizing a business.  While it's true that you have to file Chapter 11 if you have a corporation or a limited liability company (LLC), if you're a sole proprietor you can reorganize through Chapter 13.

A sole proprietor simply means a person running a business without having incorporated or formed an LLC through which she conducts the business.  If you're "doing business as" (d/b/a), you're probably a sole proprietor.  There is no legal distinction between the business and the individual in a sole proprietorship.  While this is often a disadvantage when it comes to protecting your personal assets (home, car, savings, etc.) from business debts, if it becomes necessary to reorganize the business being a sole proprietor lets you do so through Chapter 13.

Chapter 13 is only for individuals, which is why businesses generally don't file Chapter 13.  But because there is no difference between the individual and the business in a sole proprietorship, solos can reorganize in Chapter 13.  This means they can modify business leases, pay some debts, reject some contracts and often get all the advantages of Chapter 11 without the expense or hassle.  So if your business is struggling Chapter 13 might be just what you need.

Bankruptcy Mills

There is an interesting article on MSN about cut-rate bankruptcy lawyers, also known as bankruptcy mills.  You can read it here:
http://articles.moneycentral.msn.com/Banking/BankruptcyGuide/BewareCutRateBankruptcyAdvice.aspx

What constitutes a "bankruptcy mill" is in the eye of the beholder.  Filing hundreds or even thousands of bankruptcies a year doesn't make a firm or an attorney a mill in my opinion.  What does make a bankruptcy mill is when the attorney doesn't give the client the personal service the client deserves.  If the attorney is up front and says, in effect, "we'll do a bankruptcy for you for $XX, but realize that for that price you won't get return phone calls, we won't answer your questions and we won't do much more than prepare the forms and attend the meeting of creditors," the client can hardly complain.  But unless the attorney makes such a disclosure, most clients expect, and I would say, deserve personal attention.  Questions arise.  Clients expect those questions to be answered. They also expect a certain amount of "hand-holding" through what is usually a traumatic event in their lives. When an attorney ignores a client WITHOUT FIRST DISCLOSING that the bargain-basement fee the client paid doesn't entitle the client to personal attention, then that firm is a bankruptcy mill.