Paying Overtime and Exempt Employees

Many businesses run the risk of having to pay substantial amounts for back wages, interest, and penalties if they run afoul of the federal laws on minimum wages and overtime pay. Generally, unless an employee fits within one of the exemptions, the employee must be paid one and a half times hourly pay for every hour worked in excess of 40 hours per week; and all employees must be paid at least the minimum wage, currently $7.25 an hour. The source of these laws is the Fair Labor Standards Act, and various regulations enacted by the Department of Labor.

While there are specific exemptions for certain salaried executive, management, administrative, and professional personnel, the exemption does not apply simply because of the job title; there are very specific and intricate legal and factual tests which must be met before the exemption can apply.

The most common problem, however, involves the payment of overtime wages. Whether the employee is compensated by salary, hourly pay, or otherwise, the employer can be liable for overtime wages depending on the specific duties and responsibilities of the employee, and how the employee’s time on the job is recorded.

While the Wage and Hour Division of the Department of Labor has extensive information available, it is certainly recommended that you consult an attorney experienced in this area before making any decisions.

In addition, if you have received notice from the Department of Labor of a complaint or investigation, you need to contact your legal counsel immediately.

For more information, contact Russell Balch at rbalch@akridgebalch.com

Pitfalls of Being an Executor

As a general rule, the executor of an estate does not have personal liability for the debts and obligations of a decedent.  Lest executors become complacent, however, they should be aware of an important exception to that rule, which was illustrated by a recent federal court case between executors and the Internal Revenue Service (IRS).

At the time of her death, the decedent had a substantial unpaid income tax liability, in the range of half-million dollars.  There was no question that the two executors of her estate, one of whom was her son, had been aware of that liability, since they had received letters from the IRS advising them of a federal tax lien on real property owned by the decedent and of their obligation to satisfy that debt. 

The executors had even unsuccessfully challenged the lien in an administrative appeal.  Despite this knowledge, they conveyed the real property to the executor-son for one dollar.  The son then sold the property for an amount in excess of the tax liability, but later claimed that the proceeds “pretty much got blown away in the market.”

The IRS prevailed in its federal court lawsuit against the executors, seeking satisfaction of the tax liability from them.  The winning theory was that the executors, by disposing of the real estate without having first satisfied the income tax liabilities of the decedent, had violated their duties as fiduciaries of the estate of the taxpayer.

The IRS proceeded under a federal statute that holds a fiduciary liable, to the extent of unpaid claims of the government, if the fiduciary disposed of assets of an estate before paying the government.  Three elements must be present for such a cause of action, and they were all shown by the IRS in the case before the court:  (1) the fiduciary distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.

The applicable concept of joint and several liability of the executors had the potential for an especially bad outcome for the executor who had conveyed the real property to his coexecutor, the son of the decedent.  If the son does not have enough money or assets to pay the tax debt – a probable outcome given his travails in the market – the other executor could be on the hook for the entire debt, even though he never had the benefit of the proceeds from the sale of the property.   Executors be forewarned:  Be sure that Uncle Sam gets what is coming to him before distributing estate assets to beneficiaries.

Akridge & Balch, P.C. provides advice and representation for estates, and can help you avoid any pitfalls faced by executors.  For more information, go to http://www.akridgebalch.com or call Katie Klos at (334)887-0884.

Mediation: Good or Great?

Mediation is a process used to resolve all types of disputes before or during litigation. A trained and independent mediator is hired by the parties (or appointed by the Court) to make an intensive and concentrated effort to get the parties to reach a settlement or compromise which resolves the dispute. The mediator cannot force an agreement, but can give each party an independent evaluation of their case and their likelihood of success in Court. The mediator will engage the parties in a series of discussions and negotiations which, hopefully, results in a final agreement. The process is confidential and is usually completed in one day.

The advantage is that it puts resolution of the dispute solely in the hands of the parties, and not a judge or jury which may not have enough time to become familiar with the issues, or the motivations of the parties. Mediation, when successful, will save thousands of dollars in legal fees and court costs, and will end the dispute immediately.

The disadvantages are that successful mediation usually deprives one party of the exhilaration of vindication in Court. A good mediation settlement rarely leaves one party substantially more satisfied than the other–that is the nature of compromise.

For a complete description of the various forms and uses of mediation, see http://en.wikipedia.org/wiki/Mediation.

Akridge & Balch, P.C. provides mediation services in its Auburn offices for almost any type of dispute. For more information, go to http://www.auburnmediation.com or http://www.akridgebalch.com.

Starting a New Business in Alabama

Protecting your personal assets and family wealth is a primary reason for creating a new legal entity under which to conduct business.  If you don’t, claims against your business can reach your personal assets.  Even if you are just a sole owner, a single member Limited Liability Company provides you with significant protection at minimal initial and continuing expense.  Small businesses which might otherwise be automatically designated as general partnerships (in which all partners are personally liable for the liabilities of the business) can also achieve significant asset protection with a limited liability company, or an “S” corporation, both of which may also provide some tax advantages.  The Limited Partnership form is useful where the new business has outside investors who are not going to participate in the management of the company, and can provide limits to the liability of those investors.  Larger businesses, or those with more complicated financial or investment structures, can also benefit from the Limited Partnership form, or the “C” corporation, depending on their needs.

The decision as to which form of legal entity to adopt for a new or existing business is a critical decision which requires consideration of many factors such as the expected roles of each owner, the form of capital contribution, the type of startup financing, the type of business, the expected assets of the business, whether real estate is involved, the management structure, the need for future financing or capital, the tax considerations of each owner, compliance with Federal and State securities laws, the prospective market for goods and services, the expected life-cycle of the business, ownership succession issues, the business plan, and others.  The goal is to match the needs and expectations of the owners with these factors to select a form of legal business entity which best fits the owners and their business, and maximizes for the factors most important to the owners.  It is not a decision to be taken lightly or without professional guidance given the long-term consequences, and the cost and effort required to change entity form in the future.

No matter which form of legal entity is selected, it is critically important that all of the proper steps in formation are correctly followed and completed, and that all initial documents and fees are filed and paid.  Otherwise, the owners of the entity may not realize all the benefits, protections, and tax treatment of the entity which they wish to use.

The best foundation for a new business is selection of the correct form of legal entity, the correct formation of that entity, and the regular maintenance of the entity.  A relatively small investment at the beginning will likely prevent expensive problems in the future.

For more information on new business formation and legal entities, go to http://www.akridgebalch.com, call Russell Balch at 334-887-0884, or email rbalch@akridgebalch.com.

Private Reverse Mortgages

Reverse mortgages, usually obtained from financial institutions, allow people who are at least 62 years of age to convert their home equity into cash, which is received by the homeowner either as a lump sum, a line of credit, or monthly payments.  The loan becomes due, with interest, when the borrower dies, moves out of the home, sells it, or fails to pay property taxes or homeowners insurance.  The end result is often that heir of the owner sell the house, pay off the loan, and keep the difference.

Since an institution involved in a reverse mortgage is advancing money without knowing for sure when it will be repaid, there are high up-front costs for commercial reverse mortgages.  Fees can be as much as 5% of a home’s value, and required mortgage insurance premiums can range from 0.1% for loans with a low payout to 2% for those with a higher payout.

In large part because of these high fees and costs in the commercial sector, but also to reduce paperwork and to increase the amount of equity an owner can tap, some families set up private reverse mortgages.  A private reverse mortgage is basically a private loan to the homeowner, usually from a family member, that is secured by a mortgage on the senior’s house.

For the senior homeowner, a private reverse mortgage can have these advantages:

• The costs of having an attorney set up the mortgage should be reasonable and a lot less than the costs of a conventional reverse mortgage with a bank, and there are no ongoing mortgage insurance costs.  Also, the interest rate, set each month by the IRS, should be less than the rate on a commercial mortgage.

• Since there is no limit on the percentage of the home equity that can be borrowed, the owner can tap into more of that equity and put farther off the day when he or she has to move for financial reasons.

• A private reverse mortgage need not be paid back until the house is sold, leaving open the option of the owner’s moving to a nursing home but keeping the house.

• The owner can continue to receive payments on the mortgage if needed to maintain the house or to pay for extra care at a nursing home.

For the lending family members, the arrangement can have these advantages over a reverse mortgage with a financial institution:

• The financial benefits for the senior family member carry forward to the whole family, because savings on mortgage costs should translate into a bigger estate ultimately passing on to surviving family members.

• The flexibility to tap into more equity in the home could give family members the option to hire more paid caregivers or even to pay themselves for providing such care.

• Even though interest rates for private reverse mortgages set by the IRS are pretty low, they still return more than can be earned in money market accounts or certificates of deposit.  In other words, it beats having money just sitting in a bank.

There are some cautionary aspects to private reverse mortgages.  Lending family members need to anticipate that the money they advance may not come back to them for a long time.  It is also prudent to consider that there is some risk that the entire loan may not be paid back, if the ultimate proceeds from the sale of the home are insufficient to pay off the loan, with interest.  Of course, these and any other concerns should be fully aired and taken into account when the private reverse mortgage is being contemplated in the first place and when its terms are set.

If you are considering a reverse mortgage, please contact Katie Klos at Akridge & Balch, P.C. to discuss your options, or consult our website at http://www.akridgebalch.com for further information.

Organize Your Estate Planning Documents

If, like so many, you are prone to disorder in the keeping of important documents, assuming that you keep them at all, you may be well past due for a makeover of your estate plan and your end-of-life instructions.  It’s not just a matter of maintaining tidiness for its own sake: a lot of money and time could be saved by making your estate plan organized and accessible and then keeping it that way.

So what are these essential documents that you should have well organized and accessible?  Individual circumstances vary, but the first document for most people is an original will.  Dying without a will means leaving the determination up to the state as to how your assets will be distributed, and if there is some writing, but not an original document, probate proceedings could become needlessly contentious and drawn out.

In addition to a will (and any trust documents), what follows is a nonexhaustive,  but reasonably comprehensive, list of other important documents, the existence and location of which should be known to your heirs:

• Marriage license – a surviving spouse is likely to need to prove that he or she was married to the deceased before being able to claim anything based on the marriage
• Divorce papers
• Durable healthcare power of attorney (for healthcare decisions if you are incapacitated), a living will, any “do not resuscitate” order, and an authorization to release healthcare information
• Durable financial power of attorney (for financial decisions if you are incapacitated)
• Documentation of ownership of property, including housing, land, cemetery plots, vehicles, stocks, bonds, etc.
• Proof of loans made and debts owed
• List of bank and brokerage accounts, with account numbers, and any safe deposit boxes with the location of corresponding keys
• Tax returns for the most recent three years
• Life insurance policies and 401(k), pension, annuity, and IRA documents
• List of user names and passwords for internet accounts

With a little bit of foresight and planning, you can greatly reduce the administrative burden on your family and heirs after you pass.