Saturday, January 7, 2006

What is an Executor?

We’re speaking with attorney Mary Randolph, author of ‘The Executor’s Guide: Settling a Loved One’s Estate or Trust.’ Mary, perhaps you can start out by telling us some of the major tasks that an executor is required to do.

MARY RANDOLPH: Well, you’re going to have to take care of a lot of daily, everyday details. Things like having mail forwarded, things like notifying people about the death - the credit card companies, the post office, the IRS – there’s a lot of details to handle. But the major duties of an executor are to take care of the property, to find the will, and to pay debts. And eventually, to pass out what’s left, after the debts and taxes are paid, to the people who inherit it. So really for most people it’s fairly straightforward, because there are probably not too many people inheriting, and they’re going to be family members, and the assets won’t be particularly complicated to gather; you’ll know what’s there. So it’s not too complicated, but it can be tedious, and it can take awhile.

NOLO: The executor is compensated for the task performed for the estate, but in your book you say that there can be practical reasons for declining these fees. Can you explain that?

MARY RANDOLPH: It really depends on the family situation. A lot of people who are executors are close family members, and they’re going to inherit maybe all of the property anyway. If you inherit property, you don’t have to pay taxes on it (it’s like any other gift, you don’t pay taxes on it). If you are paid compensation, that’s taxable income. So if you’re going to inherit the money anyway, there’s no point in taking it as compensation.

NOLO: One thing I like about your guide that’s very helpful is that you divide the book up into things that the executor has to do during the first week, and things that the executor has to do during the first month. What was your thinking when you set it up this way?

MARY RANDOLPH: I guess I was trying to put myself in the position of someone who’s faced with this job, and you just need to know where to start. And as important as knowing what to do right away is knowing what you can put off. You don’t have to worry about taxes in the first week; there are other immediate details and emotional issues to deal with. You don’t have to worry about long-term finances then. So, just to reassure people that they don’t have to do everything at once. You can break it down and take it a step at a time.

NOLO: Executors usually know ahead of time that they’ve been chosen for this task. What are some of the things you can do to prepare for the inevitable?

MARY RANDOLPH: That’s a really good question, because there’s a lot you can do beforehand, and there’s very little you can do after a death to make it easier. But beforehand, they’re really fairly simple steps. You need to have the person either get organized, or at least give you enough information so that you know what’s going on. You just need an idea of what assets the person owns. For most people, that’s pretty straightforward – they might have some bank accounts, or investments, maybe real estate, or cars. But if they have something that’s unusual, they’ve got a collection that would have to be valued by an expert, and we’ll find out who would be a good person to value that later on. Or if they have large assets, artwork, say, maybe they’d want to sell it ahead of time; maybe they’d want to make arrangements to sell it - something that would require maybe expert help after the death. Things like insurance policies, find out about those… a lot of things get stuck in bottom drawers and file cabinets, and you don’t know where to look. At least know where to look for the important documents, like wills, trusts, insurance policies, title documents, real estate deeds…

NOLO: What about information that’s stored digitally? What if you find a digital will, for example?

MARY RANDOLPH: A digital will isn’t going to be valid. You still have to have a printed out will that’s signed. One of the key things to find out about is passwords. What happens if someone’s information is locked up, about a bank account, or a mortgage and you can’t get to it because you don’t have a password? And you’re right, many more people these days pay bills online, they manage their accounts online, their mortgages – you need to know what automatic withdrawals are going to be made that have been set up online, for example, that you’re not going to know about unless you find out ahead of time. So it’s just finding that crucial information, and again, for most people, it’s not that complicated.

NOLO: I know from personal experience that you need multiple copies of the death certificate. In my case, I was told to get at least ten. How many copies should you get, and why do you need them?

MARY RANDOLPH: You are going to need about ten. Usually people need ten or a dozen copies. They’re called a certified copy, so you can’t just make a Xerox of more of them later. So what you want to do is get them all at once, at the beginning. You’re going to need them because they’re official proof of the death. So, for example, if you want to claim life insurance policy proceeds, you need official proof of the death, and that’s what a certified death certificate does for you. If you have a joint bank account, same thing – you’re going to need it. Stocks, whatever it is… a lot of assets pass outside a will, so you’re not going through the court; you don’t have a court process to show that you’re the valid new owner. You have to prove it yourself. The way you do that usually is with a certified death certificate.

NOLO: What happens if you find more than one will for the deceased? Is the newest one the winner?

MARY RANDOLPH: Usually it is the winner. In most wills, it’s kind of a boiler-plate phrase at the beginning, it will say, “I hereby revoke all previous wills.” That’s sort of a standard part of most wills. Because most people do make more than one will; they revoke the earlier ones as their family situation changes, or the property they own changes. So it is usually the most recent one.

NOLO: Mary, what happens if you can’t find a will?

MARY RANDOLPH: Well, there may not be a will - a lot of people die without a will - or maybe you just can’t find it. You have to look, and, depending on the person, you may want to look in different places. Some people hide things, sometimes older people, when they get a little confused perhaps, sometimes they hide things in odd places. You might want to look around before you toss anything. Again, hopefully you will have found out before the death where the will would be kept.

NOLO: What happens if the deceased owned a business? Does the executor have to get involved in the day-to-day running of it, or does the executor automatically shut it down?

MARY RANDOLPH: That’s something, again, that you should have discussed beforehand, to make a plan for. That’s a really good example of something you don’t want to have to start wading into without any preparation. Usually, the executor’s role is to sell a business; usually the executor doesn’t have to manage a business. But if the person wanted the business to go on, then you should have had some kind of plan, or he or she should have had some kind of plan, to continue it, because obviously it can’t go on without a rudder. A lot of businesses are small, service businesses, that don’t survive the owner; it’s not practical. Other businesses, usually larger, might be incorporated, or they might be Limited Liability Companies, where there’s more of a mechanism in place to transfer ownership.

NOLO: How do you know when to bring in an attorney for advice?

MARY RANDOLPH: Well, I think it’s like when you might need an attorney, or a CPA, or a tax preparer in your own life. So you might either want to turn the whole job over to an expert, or you might want to go in and ask some specific questions, about a particular asset, or about a particular tax treatment or something.

NOLO: Are the people who are inheriting money going to be unhappy that you’re paying for an attorney or a CPA, since those payments come out of the estate?

MARY RANDOLPH: Well, sometimes beneficiaries are unhappy about all kinds of things, but it’s a perfectly reasonable expense. Most wills authorize it specifically; they’ll say that the executor has the right to pay experts. But even if the will doesn’t say it, you have that right, and really, it’s all for the beneficiaries’ good, because you want to close things up, and you want to make sure it’s done right. You’re not going to be able to distribute money until you’ve paid taxes, so the beneficiaries aren’t going to get their share either, until things have gotten paid.

NOLO: Your book also provides guidance for trustees who are handling simple living trusts, AB trusts, and children’s trusts. A lot of people have a preconception that managing a trust is a lot more complicated, or technical, than acting as an executor of an estate. Is that true?

MARY RANDOLPH: It really depends on the kind of trust. An AB trust is a great example of something where you’re definitely going to need expert help. It’s really got long-term tax ramifications, how you divide up the trust into the A and the B at someone’s death. Now a simple probate avoidance living trust is not such a big deal at all. It’s not an ongoing trust; you wrap it up when the person dies. It’s really very much like a will, and that shouldn’t require any expert help. So it really depends on the situation. If you’re a trustee of a children’s trust that’s supposed to last for years, again, you’ll probably certainly want some help. Now the book talks about your responsibilities, and that will help you decide when you need help with investment, or management, or distribution.

NOLO: Mary, could you distinguish between an executor, an administrator, and a successor trustee?

MARY RANDOLPH: An executor is a person named in a will. Most wills say, “I name my spouse, (for example) my grown child, as executor.” If you die without a will, and there is no executor named, the court will appoint someone, and in most states, that’s called an administrator, rather than an executor. Now a lot of states are switching terminology, and they call either person a “personal representative.” So you may run across any of those terms. A successor trustee is someone who takes over a trustee after the person who set up the trust dies. So if there’s a simple living trust, for example, that contains the person’s house, they’re the trustee while they’re alive, and then after their death the successor trustee comes in, so it’s analogous to an executor.

NOLO: Filing income taxes is already tough enough when you have to do your own, but it seems especially tricky when you’re handling an estate. Is there a practical workaround, or do you just have to dive right in and do the taxes?

MARY RANDOLPH: I’m afraid you’re stuck with diving in and doing the taxes. But this is an area where you may want to get help, and you can pay for that help, for expert help, out of estate assets. That’s perfectly reasonable to pay a tax preparer from estate funds; you don’t have to pay it out of your own pocket.

For more on this subject, check out ‘The Executor’s Guide: Settling a Loved One’s Estate or Trust.’

Wednesday, January 4, 2006

What if a Commercial Landlord Says 'Take it or Leave it'?

This an interview with attorney Janet Portman, the author, or co-author of several books about renting, leasing and purchasing real property; including Negotiate the Best Lease for Your Business (Nolo).

NOLO: Janet, let’s say you’re new to leasing commercial space. Is there a number one or number two concern that a businessperson should be aware of?

JANET PORTMAN: Of course, the first thing you think about is ‘Can you afford the rent?’ That’s an obvious one. But a not so obvious one and one you’re not likely to think about when you are planning to stay in the place where you’re renting, is the need to have an exit strategy which you can build into the lease and it need not even be an exit strategy, it can be a ‘flexibility strategy.’ You need to think about what would happen if you want to expand or if you want to contract, if you want to stay in the same place when the lease term expires and you want some assurance that you’ll be able to do that. If you want to bring in a subtenant because you don’t need some of your space, or perhaps you want somebody to take over for a period of time during the season where you don’t need as much space. Those are all flexibility rights that you might not be thinking about when you enter into the lease but they are very important, especially the final one which is how do you get out early if you need to. And if you build in that kind of flexibility from the beginning, then you’ve given yourself the ability to change as conditions and as your business grows and changes.

NOLO: Is it better to form an LLC or Corporation before leasing property in order to limit your personal liability?

JANET PORTMAN: Well, there are two kinds of protection you want as a businessperson. The first is from lawsuits from the public in general; your customers, your vendors and so on. The second one is protection from the Landlord should you be unable to pay the rent or perform any other legal obligations or monetary obligations under the lease.

Now, if you have a business in which it’s likely that you can be sued for big money--such as running a restaurant, running a gymnasium--then your risk and your exposure is rather high and you would want to form an LLC to protect yourself from lawsuits of that nature. Will that do you any good with respect to your landlord? Probably not because the landlord is going to ask you to forego your corporate or LLC shield by giving either a personal guarantee or offering someone who is financially viable, such as a friend or another business.

NOLO: Let’s talk about the length of the lease. Are there any general rules for when shorter is better?

JANET PORTMAN: The moving pieces in that equation are the market as best you can guess. What’s going to be happening with this particular property within the next few years, and in particular, at the end of your lease term and the other important piece, of course, is what’s likely to be happening with your business. If you can conclude that the value of the property will be going up and the value of properties in general are going to be going up, and that your business is likely to flourish--of course, everyone hopes that it will--then you might opt for a longer lease term so that you don’t face the hassle of having to re-rent.

On the other hand, if you’re not quite sure of the viability of the neighborhood, or if you’re frankly not quite sure about the viability of your own business, you might want a shorter term because you might jump at the ability to get out of the lease sooner.

NOLO: Janet, as you explain in your book, most landlords are represented by their own broker known as the ‘listing broker,’ and for a lot of business owners it’s not possible for them to have their own broker, who is a ‘tenant’s broker.’ Since this is a reality for so many business people, do you really have to worry if you’re only dealing with a listing broker?

JANET PORTMAN: Yes, you do have to worry because you need to realize that the broker who’s working for your landlord has a legal duty to advance the best interest of the landlord, not you. So you’re up against a stacked deck to begin with. And if you can’t afford your own broker, the thing you should do certainly is to, at some point, in the lease negotiation, show the lease to a reputable attorney who’s familiar with tenant issues and who will be representing your interest. The amount of money you’re going to spend on that lawyer for a lease review and suggestions, will pale next to the monetary consequences of signing the lease that’s stacked in the favor of the landlord.

NOLO: What do you estimate is the amount of money that you’ll pay for that type of legal representation?

JANET PORTMAN: You know, large metropolitan area, you’re looking at $200 to $250 dollar an hour fees. You could easily spend a thousand dollars asking for a review and having a meeting with the attorney, getting some suggestions as to where you should push, where you can afford to give up, and what’s really critical. And, in particular, understanding the consequences of what you’re about to sign, even if you don’t get your way. A thousand dollars in the long run is not that much, especially if you think about what you’d have to pay as a retainer if you end up going to a lawyer, fighting over a lease clause, litigating a lease clause that you could have mitigated, that you could have avoided possibly if you’d reviewed that clause with a lawyer before you signed it.

NOLO: In your book, you provide a lot of great advice about what to look out for, and how to negotiate a commercial lease. But what do you say to a landlord, who says, ‘take it or leave it?’

JANET PORTMAN: Landlords aren’t stupid and they’re going to say ‘take it or leave it,’ if it’s a landlord’s market. If space is tight, if their property is highly desirable, if there are 17 stellar businesses lined up behind you who are willing to sign on the dotted line without reading the lease, then the landlord can afford to say ‘take it or leave it.’ The only thing you can say at that point is ‘Okay,’ or ‘See you later.’ A landlord who says ‘take it or leave it,’ who doesn’t have the advantage of the marketplace however is being foolish. And you’ll find out very quickly whether that person is bluffing and can be dealt with or whether, in fact, the market is behind him and he has every ability to hand the lease to the next guy in line and get a tenant. If you have a landlord who says ‘Take it or leave it,’ and you know darn well that the property isn’t all that advantageous, that anybody looking at it is going to be asking for the same things you are, and you point that out to the landlord and you still come up against a stone wall, I think you’re dealing with somebody who’s unreasonable, who’s unrealistic and you probably don’t want to do business with that person anyway. So, look elsewhere.

NOLO: What if you’re offered an opportunity to sublease property, is there a primary concern you should keep in mind?

JANET PORTMAN: Yes, if you are the tenant and you’re about to sublease to someone or you would like to be the subtenant and get space from your friend down the street, the first thing that both of you need to check out is whether the person with the lease has a right, under the lease, to sublease. Most smart landlords will put a clause in their leases which says that the tenant may not sublease or assign the space without the landlord’s consent. And reasonable landlords will add in the lease clause that the consent of the landlord will not be unreasonably withheld. Which means simply that the landlord won’t arbitrarily say ‘No,’ that the Landlord will apply reason and good sense and objective business criteria to evaluating the subtenant. But the first thing is to check the lease and see what the procedure is for subleasing. If you don’t do that and you bring somebody in, on your own, then the landlord will have every right to not only kick that person out, but that would constitute a breach of the lease and it might constitute ground for the landlord to terminate your lease.

NOLO: In light of the disasters that happened to so many businesses from earthquakes, hurricanes and other natural disasters, what type of concerns would that raise when negotiating a lease? Will the landlord’s insurance cover your business?

JANET PORTMAN: The landlord insures the building. But your business property, your inventory, your tools, everything that you bring into the space to operate your business is not covered by the landlord’s insurance policy. And in order to cover it, you have to take out your own policy on your equipment. Incidentally, most leases will require you to do that because the last thing the landlord wants is to have you facing a huge loss, unable to recover, unable to pay the rent and there goes his tenant. So it’s very important to make sure that you get that coverage even if it’s not required, but don’t be surprised to see it in your lease.

Another issue to look for in the lease is a clause that describes what will happen if the property is damaged through fire, flood, anything actually short of the ultimate cataclysms such as a hurricane or a tornado or an earthquake. I mean you could have damage from a simple kitchen fire or equipment fire. It’s a good idea to have a clause in your lease that sets this out. Landlords, of course, will want the ability to declare either that the leases is over, you have no more right to stay there and they’re going to go ahead and fix it, and they also want the right to decide instead that the lease will simply be suspended while they make repairs. You, on the other hand, of course want the ability to make the decision whether you stay or go. It’s a common negotiating point. Who gets to declare what will happen? Will the lease simply be suspended while repairs are being made or will the lease be declared over? Now, if the building is utterly destroyed then there’s no really no question but that the lease is over. But, often times, the problems are less all encompassing and the question for the tenant, ‘Do I want to just get out of here, and start anew, or am I willing to wait a period of weeks, or even months while repairs are being made and then move back in?’

NOLO: Speaking of disasters, if you’re leasing property, what happens if the landlord goes bankrupt or someone forecloses against the building?

JANET PORTMAN: This is an area that very few people understand – landlords and tenants. And it’s actually very important because it happens quite commonly. The general rule is that if you have signed your lease, after the landlord put up the building as collateral for a loan or after the landlord bought the building, and of course, the building is more or less, collateral for his mortgage payment, then if he fails to pay out on the loan and it’s foreclosed, or doesn’t keep up with his mortgage payments, then a foreclosure will terminate your lease, unless you have some protection in the lease itself saying that whoever takes over at that point will honor your lease.

The flipside of that is that if your lease pre-dates either of those two events, then legally you would survive the foreclosure. In other words, if the building is put up as collateral for a loan after you’ve moved in, and the landlord doesn’t make his loan payments, and the lender forecloses, you would survive.

And what you want, in any situation, is you want to sort of short-circuit those two rules. And simply provide in the lease itself that if there is a foreclosure of the building, that not only will you have the right to stay where you are, regardless of the dates involved, but the new owner will be required to let you stay. That’s a very complicated clause. It’s called a ‘Subordination Attornment and Non-Disclosure Clause.’ It probably takes the cake for the most complicated and mouthful clause in the lease, but it’s very important so that you don’t find yourself out on the street because a new owner has taken over.

What's the Best Way for Parents to Choose a College Savings Program?

We’re speaking with Nihara Choudhri, author of “Parent Savvy: Straight Answers to Your Family’s Financial, Legal, and Practical Questions.”

NOLO: Nihara, one of the difficult responsibilities of new parents is to choose a guardian for their child. The guardian is the person who will look after the child in the event that something happens to the parents. What factors should parents use when choosing a guardian?

NIHARA CHOUDHRI: It’s really a really tremendously personal decision to decide who you trust to take care of your child if you’re not around. There are lots of things you should think about, but one thing I would ask you to consider is, really, who loves your child and would have an interest in caring for your child and raising your child? Who does your child love, who does your child have a good relationship with, and would trust to be in his or her home? Who has the values that are closest to your own? You know, who has the same values on religion, and child rearing, and morality, and even things like economics, like how much money to give a child, and what type of lifestyle to raise a child. How many children are in this person’s family? If the person already has three or four children, that person might not be able to really accommodate and care for your child in addition to the children he or she already has. What kind of time does that person have available to care for your child? You know, if the person works eighty hours a week as a corporate lawyer, they might not have the time to really raise the child in the manner you would want your child to be raised.

NOLO: Once you’ve picked a guardian, how do you make that an official choice, so that a court will follow the parent’s instructions?

NIHARA CHOUDHRI: The most common way, and the safest way, is to prepare a will specifically naming a guardian for your child. Writing a will sounds expensive to parents who have to hire a lawyer to write a will… parents can hire a lawyer to write a will, and a lawyer will probably charge you maybe $500 to $1,000 to do a standard will, but you really don’t have to hire a lawyer if you have a simple estate and things aren’t too complicated. Nolo has some great products. If you like to use books, Nolo’s simple will book is a great book you can use; you just fill in the blank forms, and you’ll have your will ready in a couple hours. If you are a software person, Nolo’s Quicken Will-Maker Plus is a terrific tool; you can spend a few hours, and you’ll have a will that’s valid in the state that you live in, and you can buy both of these products for under $50, and get your will done in a weekend.

NOLO: Nihara, do you have to choose a family member as a guardian?

NIHARA CHOUDHRI: Absolutely not. You can choose anyone you want as your child’s guardian. You can choose a friend, you can choose a neighbor… but if you decide to choose someone who’s not a family member, I’ll give you two pieces of advice: first, think about talking to your family members in advance, and sort of let them know the decision you’ve made, and if you don’t have the courage to tell your mom or your sister in advance that you’ve chosen your best friend as the guardian, then, at the very least, write a letter to each of the important family members in your child’s life, and include it with your will -- something to reassure your family members, to explain your decision, to keep them from contesting your choice and going to court, and to encourage them to stay involved in your child’s life.

NOLO: One topic you devote some attention to in your book is health insurance. At what point does a new parent sign a baby up as part of the health insurance plan?

NIHARA CHOUDHRI: You have to sign your baby up for health insurance within thirty days of your baby’s birth. This is an incredibly, incredibly important rule. It may seem like an annoying administrative rule, but really, it’s a rule with important legal qualifications. If you don’t sign your baby up within thirty days, your baby could be subject to what’s called a “pre-existing condition exclusion” period. To make sure you don’t forget about it, what I would recommend you do is, before you go to the hospital - it may be in the last couple weeks before you do – call your health insurance administrator. Say, “I’m having a baby in the next couple weeks. What forms do I need to fill out, and how do I get my baby added to my health insurance plan?” That way, when your baby’s born, fill out the papers, and get the baby added to the health insurance plan right away. The same holds true for adopted children. You have thirty days from the time your child is adopted, or placed with you for adoption, to enroll your child in your health insurance plan if you want to avoid the very nasty effects of this pre-existing condition exclusion.

NOLO: You advise new parents to start thinking about college as early as possible. Why? Considering that it’s eighteen years away, can’t new parents have a few years without thinking about saving for college?

NIHARA CHOUDHRI: There are a few reasons for this. First, as most parents who are following the news know this already, but, college tuition costs are growing at a much higher rate than inflation. Last year, public universities increased their rates by about 7%, and inflation was just a little over 2%. So, if you just put your money under the mattress, your money’s not going to be working hard enough to keep up with the changes in college tuition prices. So, you need to come up with some kind of plan to beat inflation. The other reason I say start saving early is to take advantage of the long-time horizon. If you take just a little bit of money a month, and invest it over a really long period of time, the power of compound earnings will make that money grow… a small amount of money can grow into a huge amount of money over time. For example, let’s say you set aside $50 a month. $50 a month is, you know, I like to think of it as maybe a couple of Chinese take-out dinners, or a couple of movie tickets and some popcorn, and there you’ve got your $50. Invest that over the course of eighteen years, every month you sock in $50 a month, you’ll have $20,000 by the end of eighteen years, which is a huge chunk of change. The last reason parents should begin saving for college early is because you don’t want to have to worry about the ups and down of the market. I mean, in any given couple of years, the market could go up, or it could tank, and you don’t want to be terrified thinking, “Oh my God, my child is going to college in five years, and the market has tanked,” because over time, the market tends to go up. So, if you take a long-time horizon, you don’t have to worry about the ups and downs.

NOLO: Let’s say that a new parent has the ability to put money away for the child’s education. What do you recommend?

NIHARA CHOUDHRI: There are lots and lots of plans out there; there are all kinds of plans. My two favorite plans are the 529 College Savings Plan, and the Coverdell Education Savings Account. Both plans work similarly from a tax perspective. You throw post-tax dollars in there, so it’s not, again, not like a 401K, not pre-tax dollars, it’s post-tax dollars. You put it into these plans, and any income or any earnings on the money you invest is tax-free, which means you will not pay capital gains taxes on any of the earnings on the money, provided you use it for a child’s higher education expenses. You can use the money in these plans to pay for tuition, room and board, books, fees… so, they’re really great plans. The difference between a Coverdell ESA and a 529 College Savings Plan is that a Coverdell ESA is even more flexible, and you can use the money to pay for private school tuition for elementary and secondary school, you can use it to pay for academic tutoring, for internet access… it’s much more flexible. So, those are the differences.

NOLO: How much money can you invest in a Coverdell ESA?

NIHARA CHOUDHRI: A Coverdell Education Savings Account, because the plan is so flexible, is actually pretty restricted in terms of how much you can invest. You can only invest $2,000 per year per child, and the plan is subject to income limits. So, if you make more than a certain amount of money, you do not qualify for the Coverdell ESA.

NOLO: How much can a parent invest in a 529 account?

NIHARA CHOUDHRI: In a 529 Savings plan, there are no income limits, so it doesn’t matter how much you earn; you could make $2,000,000 a year, and you’re still eligible for a 529 Savings Plan, and a 529 Savings Plan has really high investment limits, so, it’s something like, you know, most plans let you invest a couple hundred thousand dollars or more, so there’s plenty of room to maneuver with a 529 Savings Plan.

NOLO: How do you go about choosing the right 529 Plan?

NIHARA CHOUDHRI: There are lots of different 529 Savings Plans; each state has its own 529 College Savings Plan. Some states actually offer tax deductions for investing in the state’s College Savings Plan. So, for example, in New York, if you invest in the New York 529 College Savings Plan, you get an immediate in-state tax deduction for the money you invest. So, if you’re a New York resident, it’s kind of a no-brainer to invest in the New York plan. But many other states don’t have the tax breaks, so you might want to shop around. Even if you live in California, you might not want to go with the California 529 plan. You know, look around, take a look at the other states’ plans, and make a choice based on the manager of the fund. It’s sort of like choosing a mutual fund; you know, make a choice based on the history, the performance of the fund, the management fees… and a great website to begin researching different 529 Savings Plans is

QUESTON: Considering that people have been having babies for thousands of years without your help, why do you think parents would need your book?

NIHARA CHOUDHRI: I’ll tell you why; I’m a lawyer, and I’m a mom, and I thought because I was a lawyer that I knew enough about the basics of the legal and financial side of raising a child, that I thought, “Oh, I’m covered.” But, when I got asked to write this book, I started doing all kinds of research in writing every chapter, and, I kid you not, I changed something in my life every month when I wrote a chapter of this book, and I’ll give you a couple of examples. When I wrote the college savings plan chapter, I did all kinds of research; I had to learn about everything from 529 Savings Plans to savings bonds, and that’s when I realized, “Okay, we have to start saving for college now,” and in our family, the 529 Savings Plan in New York state made the most sense. We threw some money in there, and we saved several hundred dollars in New York state taxes; we got a refund for money that we would have saved in some way anyway, but we got a refund, and I wouldn’t have done this this quickly had it not been for the research I did writing this book. Another example is, I had to do a whole chapter on tax breaks for new parents, and one of the things I researched was the dependent care account, and that dependent care account lets you use pre-tax dollars to pay for child care expenses, and what I learned is that I can use that account to pay for preschool. So, this year, I’m paying for preschool using pre-tax dollars, and thanks to all the taxes we pay in New York, it’s more or less cutting my preschool bill in half, and it’s huge savings. So, I personally have learned so much from writing Parent Savvy; it’s helped me to be a parent to my son, and I hope it will help you be a better parent to your child.

NOLO: Nihara, thanks so much for talking with us today.

Tuesday, January 3, 2006

What Are the Rules Under the New Bankruptcy Law?

We’re speaking with Attorney Stephen Elias about the new bankruptcy law. Steve is the author of “The New Bankruptcy: Will It Work For You?” as well as, “How to File for Chapter Seven Bankruptcy,” available from Nolo.

NOLO: Steve, can you start out by giving us a summary of the differences between a chapter seven bankruptcy and a chapter thirteen bankruptcy?

STEPHEN ELIAS: Well, there are two basic types of bankruptcy available to individual consumers. One is what’s called a chapter seven, and the other’s called a chapter thirteen. Chapter seven lets you discharge most types of debt, and in exchange for that, you have to give up property you own that you can’t exempt under the applicable laws. The whole process takes about three to six months. In fact, in most chapter seven bankruptcies, you get to discharge almost all of your debt (there are a few that you can’t), and you don’t have to give up any property the way the exemption system works. You could have a no-asset bankruptcy and still come out owing recent taxes, child support, and student loans; those are three categories of debt that usually will survive bankruptcy. Chapter thirteen, as opposed to chapter seven, lets you get rid of most of your debt, and in exchange, you have to agree to apply and pay to the trustee who’s the bankruptcy official handling your case in the court, you have to pay your disposable income for a three to five year period, and that’ll depend upon what your income is. If you’re a higher income person, you’ve got to pay for five years; if you’re a lower income person, you’ll have to pay for three years. The only trick of this is you’ve got to repay at least as much as your non-exempt property is worth. So, in other words, if you have a boat, and the boat’s worth $10,000, and if you filed a chapter seven, you’d have to give it up and let it be sold for the benefit of your creditors… well, in chapter thirteen, your plan has to propose to pay at least that $10,000. So, your creditors get the benefit of your non-exempt property whether you file a chapter seven or a chapter thirteen.

NOLO: Steve, many experts believe that one of the reasons Congress revised the bankruptcy law is to force more people into filing a chapter thirteen bankruptcy.

STEPHEN ELIAS: The whole thrust of the law is that people who can afford to repay their debts must be made to repay their debts, and the way to do that is to force them into a chapter thirteen. It’s kind of a myth; there was a study done by probably the most widely used software company used by lawyers, and they studied 11,000 bankruptcies that had been filed in the six months or so before the study, and based upon their finding, only fifteen percent of the people who filed would actually have to go through a chapter thirteen under the new law. And right now, just as a matter of course, about fifteen percent of people file chapter thirteen bankruptcy. But when you get right down to it, and you start applying the tests that they have to force people into chapter thirteen, only fifteen percent of filers will end up having to file chapter thirteens.

NOLO: Considering that the leading causes for personal bankruptcy are often illness, job loss, or divorce, it seems odd that the law requires debtors to take and to pay for a personal financial management class. What are the new counseling requirements?

STEPHEN ELIAS: There are actually two counseling requirements. One, before you file, you’ve got to have debt or credit counseling, meaning you get together with somebody and then decide whether you can feasibly pay back your debts without bankruptcy; that’s the purpose of that. You’ve got to have a certificate of completion even before you file. And then, before you actually end your bankruptcy, before you get the benefits of it, you have to have a certificate of completion of, as you say, a personal financial management course. It’s a two-hour course, and there’s something in the law that says they can’t charge more than a person can pay, so I’m certain that there’s going to be a sliding fee scale. As we talk, that hasn’t been published yet, but I’m sure it will be. But, for some people, it’s going to cost, you know, a hundred bucks; this will be after they file.

NOLO: Under the new law, Congress set up criteria for filing that requires measuring your income to determine whether you’re above or below the median income of others in your state. Those below the median are considered low-income filers, and those above are considered high-income filers. But how does a person filing bankruptcy make this determination?

STEPHEN ELIAS: It’s not your actual income that you’re measuring; it’s the six-month average income before you file bankruptcy. So, let’s just say you had a $100,000 a year job, and you lose it, and you’re on unemployment, and you do that for a couple of months, and your debts are crashing down around your ears, and you say, “I’ve got to file bankruptcy.” You have to take the average of the prior six months. So, for four months, your income is going to look like it’s going to be really high, because of the $100,000 dollars. Two months, it’s just the unemployment, which is real low. Well, you throw it all in together and divide it by six… guess what? You’re very likely to come out as a high-income filer, even though you’re a low-income person. There’s no way out of that; all of the computations in bankruptcy are based upon that income figure. It’s not your true income; it’s your six-month average income – your gross income, from every source, even if it’s not taxable. You take that, you divide it by six, and then that’s your income. So, if you have to file bankruptcy soon after you lost a high-paying job, you’re going to be treated as a high-income filer, even though you don’t have high income.

NOLO: Well, what happens if you’re above the median for your state?

STEPHEN ELIAS: If you’re above the median income, it’s going to be presumed that you can’t file for chapter seven, unless you can show that you couldn’t pay back at least some of your debts. So, they kind of make you disprove that you’re qualified for chapter thirteen.

NOLO: Does this income test apply to all of the money that you receive? For example, does gift income count?

STEPHEN ELIAS: Well, just a gift is a lump sum; that’s not really income. It’s reoccurring income, and, incidentally, social security… anything that comes from social security is not counted as income, just as an important aside. I should say also that disabled vets, if their debts come while they were in active duty, they’re not counted; they’re just fast-tracked to low-income status, and also, if you’re a business debtor. A lot of people file chapter sevens because they failed in business, and when you look at their debts, they’re really due to the business. If more of their money debt, you have a $100,000 dollar debt, and $51,000 is from your business, you’re no longer a consumer debtor, you’re a business debtor, and business debtors aren’t subject to this. So, you’ve got to kind of narrow down the categories as to who the income test applies to.

NOLO: Where can you find the criteria for applying the income test? Is there a government website?

STEPHEN ELIAS: This is a Department of Justice site, and it’s the site operated by the Office of the U.S. Trusty, and the Office of the U.S. Trusty controls everything that happens in the bankruptcy court. Of course, the judges are in there to make decisions, but every other facet the Office of the U.S. Trusty is in charge of. And you go to, and then there’s a link, and it’s called “means test.”

NOLO: One thing the new law supposedly does is it makes child support a higher priority for debtors. How does this work?

STEPHEN ELIAS: When there are assets in a chapter seven that are sold for the benefit of the predators, there is a list of priorities, who gets that money first, who gets it second, who gets it third, and under the old law, child support was the seventh priority, and under the new law, they moved it up to the first priority. However, in most chapter seven bankruptcies, there are no assets, there is no distribution, so there is no reason. It doesn’t make any difference where it fits on the priority list; it’s just window dressing. There’s also a lot of language in the new law requiring the trustee to give anyone who is owed child support information about the bankruptcy filer. So, there’s a lot of notification. So, if I’m owed child support, and somebody files bankruptcy, I’m going to get a notice from the trustee, “Hey, this guy’s filed bankruptcy,” and when the bankruptcy is over, I get another notice of the address. If they’re hiding from me, the bankruptcy court will help them not hide from me. So, there’s a bunch of that language in there, too.

NOLO: Every state has a homestead exemption, an amount or value in the home that the debtor’s allowed to exempt from creditors. Now, some wealthy people preparing to file move to states like Florida, where the exemption is unlimited. Does the new law do anything to deal with that sort of abuse?

STEPHEN ELIAS: If you’ve purchased your home within less than forty months from when you file for bankruptcy, you can only claim up to $125,000 exemption. Now, that looks great, and it takes care of the Florida problem. Texas has the same situation, and there’s six other unlimited homestead exemptions, mainly in the Midwest; all the rest of the states including California, New York, Massachusetts, and all the other states have homestead exemptions of some amount. They vary tremendously because it’s based upon each state’s exemption system. So, in Massachusetts, you can exempt $500,000 worth of equity in your estate; in California, you can exempt up to $150,000, in New York, you can exempt now $50,000; it was just $10,000 until this August of 2005, and then they bumped it up to $50,000.

NOLO: One thing I’ve heard about the new law is that bankruptcy attorney fees are likely to increase. Is that true?

STEPHEN ELIAS: The law is more complex, there are more things for lawyers to worry about, plus the lawyers themselves are now being heavily regulated by the Office of the U.S. Trustee. I think they’re more regulated in this particular practice now than any lawyer in any practice. All of that, by universal feeling, is going to at least double the fees of bankruptcy lawyers, and that, frankly, is, depending on where you are, whether you’re in rural or urban, you’re $1,500 to $2,000 for even a simple chapter seven bankruptcy. Let me put it this way: there’s almost no such thing anymore as a simple chapter seven bankruptcy from a lawyer’s standpoint.

NOLO: Considering that many people believe the new law makes it harder to file for bankruptcy, what are the alternatives? What happens if you don’t file?

STEPHEN ELIAS: If you don’t file bankruptcy, then you’re prey to the bill collectors, and if you’re prey enough to the bill collectors, they will hound you, and hound you, and hound you, even to get a judgment, and then garnish your wages, and take your bank account… they’ll be after you until you kind of beg, borrow, or steal money from your parents or somebody who can actually pay them off, because it’s hell to live at the mercy of debt collectors.
NOLO: So, what are the choices that a debtor has when considering bankruptcy?

STEPHEN ELIAS: You either have to hire a lawyer to represent you, or you have to be responsible for your own case. And, of course, Nolo thrives on telling people how to do their own bankruptcy, and I’m working as we speak to update the core chapter seven book, published by Nolo, which is, How to File for Chapter Seven Bankruptcy. That won’t be out until April. However, in the meantime, this book that is about to come out, we talked about, The New Bankruptcy it’s called, explains all this.

Monday, January 2, 2006

What Are Some Common Tax Deductions for the Self-Employed?

The following is an interview with attorney Stephen Fishman, who’s the author of several on books on tax deductions including Deduct It, Home Business Tax Deductions, Every Landlord’s Tax Deduction Guide, and Tax Deductions for Professionals.

NOLO: Steve, what’s one tax deduction that a lot of people overlook?

STEPHEN FISHMAN: One deduction many people don’t take, even if they’re entitled to it, is the home office deduction. Many people are afraid it will result in IRS audit, or they don’t understand that they are entitled to it, and it is one of the best deductions for self-employed people if you use a home office exclusively for your business, you would be entitled to it and it’s especially a good deduction if you’re a renter because it will enable you to deduct a portion of your rent, an expense that is ordinarily not deductible.

NOLO: If you’re making the home office deduction, which do you recommend using the square footage method or the room method?

STEPHEN FISHMAN: I recommend trying both and using the one that gives you the greatest deduction. Generally, the room method will give you a larger deduction but it won’t always. It depends on how many rooms you have in your house obviously. If you have one room, you’ll be better off with the square footage. It depends on the size of the room and the number of square footage in your house. I would try both and use the one that gets the largest deduction.

NOLO: You say in your books that you can’t deduct commuting to your job, but that you can deduct traveling from your home office to a client. Why is that so?

STEPHEN FISHMAN: Commuting from home to the office or another workplace is considered a personal expense. Commuting from one business place to another, is considered a business expense. When you have a home office your home is now a place of business. So, you’re going from one place of business to another. And that is now a business expense not a personal expense.

NOLO: Here’s a similar question for travel deductions. Which makes more sense, using the standard mileage method or the actual expense method?

STEPHEN FISHMAN: The standard mileage method would generally not totally recompense you for your actual expenses, but it’s much easier to use because there’s far less record keeping involved. That’s why most people use the standard mileage rate. If you like to get every cent you possibly can and you don’t mind keeping track of every penny you spend on your car, you can use the actual expense method, and you will probably get a somewhat larger deduction. Of course, it depends how many business miles you drive.

NOLO: The rules for deducting entertainment seem so tricky as to make it not worth the effort.

STEPHEN FISHMAN: It’s not very hard at all. You just have to keep track of how much you spend and note the business reason for the expense, and keep your receipts. If they’re more than $75, you get the deduction. For many people it’s an extremely valuable deduction if you have a lot of business entertainment, you can deduct 50 percent of your business meals which can be a very substantial deduction for some people. You have to have a business purpose, not just – you have to eat with a client or a customer and you have to discuss business either before, during or after the meal.

NOLO: Steve, let’s talk about the 179 deduction for a second. Since Congress has extended the amount that you can deduct under 179, does it ever make sense to claim depreciation?

STEPHEN FISHMAN: There are some things you can’t use Section 179 for – for example, when you convert personal property to business property, and you can’t use [Section 179] for real property either. So there are times you have to use depreciation. If you buy over $430,000 dollars in one year, your deduction is also limited under Section 179.

Also, if your income is quite low this year, you might prefer to depreciate the expense if you expect your income to go up substantially in future years. You take the depreciation deduction on those future years when your income is higher and you pay a higher tax rate.

NOLO: What’s a tax credit and how can you find out if your business is entitled to one?

STEPHEN FISHMAN: A tax credit is an amount you’re allowed to deduct from your income tax. For example, if you get a $1,000 tax credit, you can deduct $1,000 from your income tax which makes it much better than a tax deduction which only reduces your taxable income. An example of a tax credit is when people refurbish their property to make it accessible for the disabled. You can have up to $5,000 tax credit every year.

NOLO: What kind of deductions can you make if your business is the victim of some natural catastrophe such as an earthquake, flood, or a hurricane?

STEPHEN FISHMAN: You may deduct the uninsured loss from your tax as a loss, a business loss.

NOLO: What if the insurance hasn’t paid? How do you know what you can deduct?

STEPHEN FISHMAN: You have to estimate how much you’re likely to recover from your insurer and just deduct the amount that you don’t expect to recover.

NOLO: What kinds of deductions can a small businessperson make for retirement plans?

STEPHEN FISHMAN: Well, there are a vast array of deductions when you’re self-employed. You have, of course, the traditional IRA which anyone can have. You have special IRAs for self-employed people called a SUP IRA.

NOLO: When you say self-employed, do you mean you have your own business?

STEPHEN FISHMAN: That’s right. You have your own business.

NOLO: Since such a small percentage of people are audited, does a taxpayer really need to be that concerned about dotting their ‘i’s’ crossing their ‘t’s’ when it comes to deductions?

STEPHEN FISHMAN: Well, it’s really true that only a small percentage are audited; only about around two percent of self-employed people are audited. So the odds are that you will not be audited. However, if you have a lot of odd-looking things on your tax return that will definitely increase the odds you will be audited. And there’s always the chance you’ll be audited. About 200,000 self-employed people were audited last year. And there’s always a chance you could be one of them. Depends if you want to play what they call ‘the audit lottery.’ You can do that and you may win. You may not. It’s up to you.

Should You Form A Corporation or LLC

This is an interview with attorney Anthony Mancuso, an expert on business formations and the author of many best selling titles including LLC or Corporation? How to Choose the Right Form for Your Business.

NOLO: Tony, when people find out that you’ve written all these books on business formation and corporations and LLCs, is there one common question that you’re often asked?

ANTHONY MANCUSO: People usually ask a very general question. ‘What is the best form of business?’ When they hear that I write books for Nolo. I usually tell them the best form is no form at all until you have a reason to think about. If you’re worried about lawsuits, if you’re going into business with someone else and want to make sure you have an agreement in place that covers some of the contingencies then it might be time to start thinking about it.
Typically, once people worry about limited liability issues or take a look at insurance costs and worry about uninsured risks and those types of things, that’s when they may think about forming an LLC, a limited liability company. When they want to raise capital, or find that they’re making a little too much money and getting taxed on everything, then they may think of forming a corporation to shelter some money in their corporation. But generally, that’s my answer: wait until there’s a need, and it becomes important more than a theoretical question.

NOLO: Is the LLC always the best choice for the owner of a start up business, seeking to limit personal liability?

ANTHONY MANCUSO: It generally is and people that haven’t heard the news about LLCs often think of S Corporations, but really the LLC has replaced the S Corporation. [The LLC] lets you form a legal entity that insulates you from liability for business--that’s claims against your business--and at the same time it keeps your current tax status. So if you’re a sole proprietor and you form a one-person LLC, you’ll continue to be taxed as a sole proprietor. If you’re a partnership and you convert to an LLC, you’ll continue to have your business taxed as a partnership so you don’t change your tax status.
And another important part of it is if you’re ever thinking of having your business own real estate, it can be a very, very big mistake to form a corporation because you’ll get hit with double tax on the appreciation of any real estate owned by the business. That’s not true of an LLC.

NOLO: If you’re trying to form an LLC or a corporation by yourself, that is without the aid of an attorney, are there one or two things that you really need to watch out for?

ANTHONY MANCUSO: The first thing is to really stay focused on forming an LLC in your own state. If you go on the web and you take a look at a number of the books, you may see a lot of talk and titles about forming a Delaware LLC or a Nevada LLC or forming out-of-state where the taxes are lower. That doesn’t do you much good. In fact, it just creates more problems. You want to stay in your home state because that’s where you’ll be taxed ultimately. It won’t matter if you form a Delaware corporation and you make your money in California, California is going to want to tax you anyway. So you won’t save anything. In fact, you’ll be setting yourself up for double costs if you do that.
So, stay within your own state. I would suggest if you know someone who’s experienced with business taxes and law, it’s always a good idea to have a consultation with them for an hour, just to make sure about your decision to form an LLC and the tax consequences. Because LLCs, if they’re co-owned, they’re taxed as partnerships and partnership taxation is quite complicated and there’s a number of elections to think about ahead of time. So it’s really a good idea, particularly from a tax perspective, to go over your decision to form an LLC with a tax person who really knows partnership taxation.

NOLO: There’s a lot of advice available for people who want to form an LLC or a Corporation, but you don’t see much discussion about what it takes to shut down one of these entities. How hard is it to dissolve an LLC or a corporation?

ANTHONY MANCUSO: Well, fortunately, most Secretaries of State have online forms to do it. It’s usually just a one-step process. At least legally it’s a one-step process. You’ll file a Dissolution Form in most cases, with the state, and it’ll dissolve it. It’s a little more involved from a tax perspective because you have to get a tax clearance usually as well from your state tax agency and that’s simple enough. Some states though it’s not quite as simple. In California, for instance, that has its own tax forms, it doesn’t follow the federal tax forms, you’ll have to file a special tax form with the Franchise Tax Board. But you’ll also need a tax clearance.

NOLO: Income shifting seems very complex. Is there an easy way to describe what that is?

ANTHONY MANCUSO: Try to not think of it as income shifting because it’s all your money and it continues to be your money. But if you form a corporation, you can split your income between yourself and your corporation. And the way to think about it is if you start making more money than you actually put in your pocket, if you have an unincorporated business form, what happens is since we have a progressive tax rate structure, the more money you make, the higher your tax rate is. That's your marginal tax rate--that is, the amount of tax you pay on each new dollar earned in your business.
So, since that can go up to 35 percent, some people feel that their marginal tax rate is a little high because they’re really not seeing that money. That money is being kept in their business. So, if you incorporate, you can keep some of your money in the lower corporate 15 and 25 percent tax bracket.
So, if it’s really kept in your business anyway, you can save some money. I wouldn’t suggest incorporating just for this reason although some people who are desperate to save every possible tax dollar do talk about it this way. I tend not to. It’s just one of a number of factors in the decision to incorporate but it can help save you a little money so that maybe money kept in a corporation is taxed at 25 percent. If it were taxed to you, if you had an LLC or a partnership or a sole proprietorship, it might get taxed at a 10 percent higher rate, at 35 percent.
So, you can save some money if it’s being kept in your business because corporate tax rates start lower than most business owners’ marginal tax rates. So, instead of paying 35 percent, keep it in your Corporation, you could pay 15 or 25 percent of that money.

NOLO: If you register your business in one state, what does it mean for you to have to qualify in another?

ANTHONY MANCUSO: Qualifying means you have to file papers, very similar to incorporation papers or LLC articles of organization. It’s basically having a formal legal presence in another state. If you have only incidental contacts in another state, you sell through mail order, over the web, or you have a physical presence in another state, you generally don’t have to qualify and you shouldn’t worry too much about it. But, if you start having a real presence there, if you hire people who are there, who are telecommuting and they’re on your payroll but they live somewhere else, you can maintain inventory in another state, if you travel there a lot and talk to people a lot, if you just really start becoming more physically present in another state, then it’s time to think about qualifying. Basically, it’s a similar process to incorporating or filing articles for an LLC in another state. You have to pay a qualification fee, and you have to appoint a registered agent in that state.
The downside of not doing it when you’re required is that you won’t be able to sue other people in another state if you have to – if you have contracts in another state, you won’t be able to enforce them. And generally, to use the courts in another state, you’ll have to qualify and pay any back penalties for not qualifying.
So, it’s just neater all around, once you’re physically present in another state, to just go ahead and file those papers and pay the initial fee. They’re not terribly high and it just makes you fully legal in the other state you’re working on.

NOLO: Tony, you hear lawyers talking about ‘piercing the corporate veil,’ what is it and how often does it happen?

ANTHONY MANCUSO: Yeah, it’s a really bad mixed metaphor, but it generally means that the owners of a corporation or of an LLC can be held personally liable for the debts of the business or claims made against it. So, someone can sue your LLC or corporation and if they can convince a court to pierce the corporate veil, they can go after your personal assets. And, of course, the main reason for forming an LLC or a corporation is to insulate yourself from those type of personal liabilities, and in fact, they’ve defeated your incorporation or your LLC formation and that’s something you don’t want to see happen.
It’s very, very rare and that’s the main thing to keep in mind. It only happens in cases where someone has committed a fairly serious fraud against someone else, and a court determines that the only fair way to resolve a dispute is to hold someone personally liable.

NOLO: Tony, you often read that the District of Columbia and Massachusetts are the only two states that require at least two members to form an LLC. But that’s not true any more, is it?

ANTHONY MANCUSO: Up until recently they did require. They were the last two-holdout states that required two members to form an LLC. And now, there’s a carry over from the old tax rules that no longer apply.

NOLO: Of all your books, which is the one that’s probably best for the business owner who doesn’t know which business entity or which business form to adopt?

ANTHONY MANCUSO: The one that I’ve done that I like, that goes into a little more depth than the typical business form comparison book is LLC or Corporation? It digs beneath the surface a little bit more than the average business comparison book and talks about the tax and legal ramifications of forming an LLC or a Corporation and converting from one to the other.
Those convergency areas are very important because during the life cycle of a business, it’s not enough to form the right entity, you also have to consider when you’re forming a business, how it can migrate to another form, and your initial choice will determine that.
So, if you choose the wrong one to start with, you often can’t move to the next proper choice as your business evolves.

NOLO: Do people really need to worry about personal liability if they have sufficient business insurance?

ANTHONY MANCUSO: If you feel comfortable with your current level of coverage, given the type of business you’re in, then you don’t really need to worry too much about your business form at least for legal liability reasons. You may want to form a particular type of business for tax purposes. But the main reason to form an LLC or corporation for legal purposes is to limit your liability. If you have adequate insurance, by the way, you’re in the minority, but if you do, then maybe you don’t have to think about it, and you can just go about your life and your business without worrying about this. But, for most people, that’s not true.
If you’re dealing with the public, if you have people come on your premises, or if you’re doing any kind of contract type of business with others it’s just truly these days that disputes often end up in Court or have the potential to – it helps business owners sleep better at night to have this type of automatic liability insurance, this kind of automatic insurance they obtain by incorporating or forming an LLC.