Personal Assets at Risk in Business Bankruptcies

Many entrepreneurs don't realize that their personal assets (homes, cars, savings, etc.) may be at risk if their business files bankruptcy. This is because many entrepreneurs do business as sole proprietorships, which, in the eyes of the law, is simply the individual doing business under an assumed name. When that happens, there is no business entity apart from the individual: they are one and the same. If business debts force the business to close, all of the assets of the individual are at risk to pay creditors' claims, and if the business files bankruptcy, it's really the individual who is filing, so all of his or her assets pass under the control of the bankruptcy trustee.

Incorporating or forming a limited liability company (LLC) is some protection, but not if banks and other creditors require personal guarantees from the officers, members or shareholders.

Do It Yourself Wills

I just read a blog post from a woman touting an online legal service provider, telling the world how great and easy it is to do your own will online through this company. I've previously posted about the pitfalls of do it yourself bankruptcies, but a do it yourself will is even worse. At least if you make a mistake in your bankruptcy, you have a chance to fix it. If you screw up your will, not only can't you fix it, you won't even know something is wrong.

There are a host of potential problems with a do it yourself will and estate plan. Yes, you can provide for someone to have legal custody of your children. But what about providing for them? What instructions are you going to leave and how binding will those be about whatever they inherit. For example, you do have life insurance don't you? Do you plan to leave that to the kids outright? To a 12-year old? Or are you just going to name your BFF as the beneficiary under the policy and hope she knows what you would do?

Think about it. Would you feel comfortable about buying a kit and instructions to build a car or a house from an online company and do it yourself? Doesn't your family deserve better?

Estate Planning for Blended Families

When a person remarries, either after a divorce or death of the former spouse, and children from the first marriage are involved, a whole host of estate planning problems crop up. Remarriage may not be the joyful event to the children that the marrying parent wants it to be. Questions naturally arise over who gets what. Here are some tips for making a second marriage smoother when it comes to estate planning.

First, discuss matters with your new spouse. He/she may also have children of a former marriage, which complicates the issue. Discuss your plans and hopes for your children and your new spouse's children.

Secondly, in your discussion, set some goals. Are your children minors who still need some form of support? If so, providing that support should be a major goal. If they are grown and have families of their own, what about grandchildren? Decide what you want to accomplish.

Third, consider a trust. In my view, anyone with an estate to pass to heirs should have a trust. It will allow flexibility in distributing your assets. When it comes to real estate, if the couple is older and one of the goals is to provide a place for the surviving spouse to live, consider a life estate to that spouse with the remainder passing to the trust.

Fourth, talk to your family. Don't surprise them after your death when the will is read.

Fifth, talk to a professional. Planning for blended families is one of the most complex tasks in estate planning. Don't try to do it yourself.

Credit Card and Medical Bankruptcy

I just read an online article that talks about filing a "credit card bankruptcy." Over the years I've had people ask about "medical bankruptcies" as well. There seems to be some almost universal misunderstanding that leads people to believe they can file bankruptcy against certain types of debt, such as credit cards or medical bills, but leave out other debt, like home loans, car loans, etc.

Bankruptcy is an all or nothing proposition. You either file against all debt, whether you want to or not, or you file against none. You don't get to pick and choose. It is possible to exempt certain debt from your discharge -- that's called "reaffirming" the debt. But the creditor has to be listed in the first place, which means the creditor will receive notice of the bankruptcy.

A 529 Education Savings Plan as Estate Planning Tool

A 529 education savings plan is a plan where you select the recipient ("beneficiary") and make contributions for that person's post-high school education. The beneficiary can be a child, grandchild, nephew, niece or just the neighbor's kid. You make the contributions in any amount you want. You can change the investment strategy or even the beneficiary. And those contributions can be used to reduce your overall estate for estate tax purposes.

The law currently allows a lump sum contribution of $65,000 per beneficiary, with an unlimited number of beneficiaries. That is money that won't be in your estate at the time of death, and therefore not subject to the estate tax. Remember that the current limit for estate tax is $3.5 million, but a lot of people expect the Obama Administration to push for a reduction back to the $1 million limit that existed nearly 20 years ago when Clinton was president.

There are some quirks about 529 contributions. For example, you cannot make other reportable gifts to the recipient during the five-year period after the gift, and, if you die during that five year period, a pro-rata share may come back to your estate. But it's a good way to reduce your estate.

If you're a grandparent and own the account (it is possible to set up the account in the beneficiary's name), the amount in the account is not counted when it comes to determining whether the recipient is eligible for student aid, such as grants and loans.

Will Bankruptcy Stop Foreclosure?

This is a question that is asked frequently, and the short answer is, yes, filing bankruptcy will stop foreclosure, at least temporarily. The more important questions are, for how long, and will I be able to keep my house. The answers to those questions are maybe.

If you file Chapter 7, the bankruptcy will stop foreclosure only until the creditor gets relief from the automatic stay, which is a court order saying it can continue the foreclosure process. If you have equity in the house, the trustee will likely sell the house and use the equity to pay your creditors. Either way, unless you redeem the house (pay the equity to the trustee) or work out a repayment with the bank, you will lose the house.

If you file Chapter 13, you can keep your house as long as (1) you can make all the house payments in the future; and (2) you make up the past due payments in your Chapter 13 plan. For example, let's say you file on September 5, at which time you owe six past due payments, April through September, of $1,000 each. In your plan you must pay that $6,000 back and you must make each payment of $1,000 going forward, beginning with October.

Estate Tax "Patch" Likely

The estate tax is scheduled to disappear in 2010, to be revived in 2011 at 2001 levels, which means a $1 million exemption instead of the 2009 exemption of $3.5 million, along with an increase to 55% tax from the current 45% bracket. However, recent news indicates that it is likely that Congress will extend the 2009 level through 2010, while it seeks a more permanent overhaul of the estate and gift tax code. It's almost a given that Congress will have to re-implement the estate and gift tax for 2010, because its disappearance, even for only a year, is a huge blow to tax revenue. Hopefully, though, when it is made "permanent" (whatever that means), it will not be at the low 2001 level of $1 million.