Business


OK, I’m not talking about an actual spare tire – I’m talking about a Power of Attorney.  Yes, a Power of Attorney is just like a spare tire; I’ll let that analogy sink in for a few moments.  The term “Power of Attorney” is not foreign to most people, but how many of them really understand what it means?

 A Power of Attorney (POA) is a legal document but it has very little to do with an attorney.  Although your attorney prepares the document, your attorney is usually not named in the document and has no power under the document.  Instead, your POA allows you to name a family member or close family friend as your attorney-in-fact (i.e. your Agent) to handle your financial affairs for you, pay your bills, manage your investments, etc.  Many people consider a POA as something intended to be used if you become incapacitated, but most POAs are effective immediately and can be used if you are simply unavailable (for example, when one spouse is traveling out of the country and the other spouse needs to sign loan documents for a bank).  The important thing to know is that if you don’t have a POA in place and you become incapacitated, then your family will likely need to have a legal guardian appointed for you by the court; this  can be an expensive and time-consuming process.

 My clients often struggle with the decision of who to name as the Agent in the POA.  My advice is to name someone that you trust implicitly with everything; someone you would gladly hand your credit cards and checkbook to without any concern.  Typically a 19 year old child is not the first choice unless your chief goals are to 1) hit all the best concerts  within a 2 hour drive, 2) maintain a high profile in the local club scene, and 3) have an endless supply of Red Bull.  Most often people pick someone in their family or a close family friend who has sound business judgment and good money management skills.  Also, it is important to pick someone who is likely to get along with most everyone in your family; this will hopefully avoid potential conflicts in the future.

 A POA does not allow your Agent to do everything for you.  For example, your Agent can’t make or change your Will, can’t get a divorce for you, and can’t act in your place as an officer in a company; however, most other legal or financial matters that require your signature are fair game.  The POA may also allow your Agent to make gifts to your family from your property and you should make sure you review that option in the document if that is a concern for you one way or the other.

 In North Carolina if you sign a POA and later become incapacitated the POA must be recorded in the local Register of Deeds; most financial institutions will require that the document be recorded before honoring it in any event.  A financial institution may have other requirements and make the Agent jump through a few other hoops before accepting the POA, but ultimately once they are satisfied that everything is in order they will cooperate with Agent and allow the POA to work as intended.

 I am sure you get the point now about driving around without a spare tire.  A POA is something that you may never need, but if you do, you will be glad you have it.

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Now that we are in recovery (hopefully) from the great banking flu of 2008-2009, it has become clear that doing business with banks has changed quite a bit.  Gone are the days of quick loan approvals and business loans secured only by the underlying business.  Even more than ever, banks now look for personal guarantees from well-heeled individuals to secure a business loan, and if you are the guarantor, you need to consider several details.

 For any of you who needs a refresher on the basics of a personal guarantee, refer to my July 2009 newsletter.  The first thing you need to understand is that most guarantees are a guarantee of payment not collection.  This means that if there is a loan default the bank can show up at your door and demand payment; it doesn’t have to try to collect from the business, or other guarantors, or even foreclose on property first.  Banks are also regularly requiring guarantors to pledge liquid assets (e.g. a marketable securities account) as security for the guarantee.  This makes it even easier for the bank to recover from the guarantor immediately on default.  It also means that as a guarantor you will be required to tie up these liquid assets often for the full duration of the loan.

 If you have been asked to sign a guarantee, there are several things to watch out for.  How long is the guarantee?  Usually it will run for the duration of the loan but the guarantee will likely provide that the loan (and the guarantee) can be extended by the business without your approval.  The business can likely also agree to a higher interest rate or make other changes in the loan without your approval.  Most importantly, is the guarantee limited to a specific amount? Look carefully….it probably isn’t and that could expose you to a lot more liability than you expect.  If you have other deposit accounts with the bank, the guarantee will often provide that the bank can hold those accounts if it needs to collect from you.    The bank may be willing to negotiate some or all of these items, so make sure you ask and by all means have your legal counsel review the document before you sign.  Also it is very important that you stay informed about how the business is doing and whether it maintains the loan in good standing; the bank is not obligated to let you know if the loan falls behind.

 Many loan guarantees involve several individual guarantors which helps share the pain if the bank ever enforces the guarantee.  However the bank is usually not required to collect from all guarantors; if one guarantor has sufficient collectible assets the bank can pursue that person alone.  For this reason, many guarantors enter into an indemnity agreement to ensure that if one guarantor is required to pay more than their fair share of a loan, then all the other guarantors will reimburse them.  If you are in a transaction with several guarantors, you should also consider their personal assets and make sure you can recover from them if you get stuck paying the bank.  For example, if they have much of their wealth in retirement assets or  joint real estate with their spouse, you may have a difficult time collecting on the indemnity.

 This all  reminds me of the old poker saying….if you cant’s tell who the sucker is at the poker table, it is probably you.  Don’t be the sucker when it comes to your guarantee.

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Many of you have heard about the benefits of owning real estate in a limited liability company (LLC) to provide protection from liability arising out of your ownership of the real property.  See my June 2009 newsletter for further discussion.  This is pretty standard advice that you will hear from most advisors, including me.  However there is one area where the decision to re-title real estate into an LLC is not so clear: real estate owned by husband and wife, particularly where one of them is in an occupation that is exposed to professional liability.

In North Carolina real estate owned by husband and wife as tenants by the entireties is protected from each spouse’s individual creditors.  This means that if one spouse has a judgment entered against them individually, the judgment creditor cannot enforce the judgment against any real estate as long as the real estate is owned by husband and wife as tenants by the entireties.  This can be important, for example, where one spouse is a doctor and subject to potential malpractice liability.        

If real estate is re-titled into an LLC as per the typical advice, then the husband and wife will lose this special protection which only applies to real property; their ownership interest in the LLC will be subject to their individual creditors.  Some of you may be thinking….but doesn’t owning an LLC interest provide some protection against collection from creditors?  Yes it does…but not nearly the protection afforded by the special tenancy by the entireties rule.  Now I am not saying that a husband and wife should never use an LLC for real estate; many of my married clients do.  My point is simply that there are some circumstances where re-titling real estate into an LLC may not be the best choice.  You’ll need to consider the decision on a case-by-case basis.

A few imporant qualifications to note….

1.  This special rule only applies to real estate owned by husband and wife as tenants by the entireties; that is the default type of joint ownership for a husband and wife in NC, but the real estate can also be titled as “tenants in common” which does not afford the special protection.  You need to check your deed to be sure.  Also, if one spouse owned the property before marriage then it is not in tenants by the entireties unless it is re-titled after the marriage.

2.  I am only speaking about NC law.  If you have property in another state, the discussion above is irrelevent for that property, though there may be similar laws which apply in the other state.

3.  The IRS takes the position that it is not bound by this special exception, so it may enforce an individual claim against any property owned by husband and wife.

4.  The protection only applies to individual claims; if both husband and wife are liable for a claim the protection is not applicable.

If you are married and considering an LLC for real estate, make sure you ask about the tenancy by the entireties rule.

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What’s the point of a contract if I have to sue somebody to enforce it? Unfortunately, this is a question I have had to answer quite a few times over the last couple of years.  Imagine you want to enter into a business transaction with another person or business…we’ll call them the “Other Guy”…that’s a little easier than “party of the second part.”  Anyway, you sign a contract with the Other Guy and the contract has all the big words and seems to cover every possibility and you feel good about everything.  Then things don’t go as planned and the Other Guy fails to perform his part of the bargain.  Well the contract is pretty clear that the Other Guy has to perform right?  What’s the problem?

The problem is that a contract is not a gun.  You can’t waive a contract in someone’s face and make them do something they don’t want to do or can’t do.  Your primary recourse is to enforce the contract through the court system (i.e. you have to sue them).  Litigation is expensive and slow.  Even if you ultimately  prevail the cost of the process may greatly outweigh the potential contract benefits being enforced.  Further, even if you win a big judgment, you may not be able to collect if the Other Guy has no money.  Thus, in many cases even if the Other Guy is clearly breaching the contract, your most cost-effective option is to walk away.  I know some of you are thinking…where is the Corleone Family when you need them?

Now the prospect of a litigation roadblock doesn’t mean that you shouldn’t talk to an attorney if you believe you are being wronged.  You may decide to pursue the matter yourself in small claims court after a little coaching from an attorney.  There are other small and inexpensive steps short of litigation that an attorney may be able to help you with even if you have no intention of proceeding with a full law suit.  Sometimes all the Other Guy needs is a little push, and a demand letter from an attorney is enough to do the job.  I need to mention that if your contract has a provision allowing attorneys fees to be awarded if you prevail in litigation, that can often be useful leverage in obtaining cooperation from the Other Guy even when the contract dispute itself does not involve much money.  Again a review of all the facts  is important in deciding how to proceed in a contract dispute.

So what is the point of a contract?  A contract is designed to set the ground rules for a transaction and to address different conflicts that may arise and hopefully avoid surprises.  A contract does not guarantee that the Other Guy will perform.  Keep in mind that most people are honest and would not intentionally ignore or breach their obligations under a contract; however, many of them may simply find themselves in a position where they can’t perform.  They have made bad business decisions or suffered setbacks which make it financially impossible for them to live up to the terms of the contract.  Whenever you enter into a contract, you should consider things such as Who are you are doing business with? What is their experience and track record?  How likely is it that they may default? Do they have the resources to perform?  Don’t rely entirely on a contract to protect you.  Caveat emptor.

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