Safeguarding Your Estate: Addressing Undue Influence

In a recent estate case, the Nebraska Supreme Court applied a hearsay exception to allow the decedent's prior will as evidence of her testamentary capacity to execute the will contested by one of her sons. 

In the Estate of Walker, the decedent, Rita Walker, died at the age of 84 and left her estate to Mark Walker, her son, naming him sole beneficiary and personal representative. Rita's will excluded her three other sons. Michael Walker, one of these sons, sued to contest the will on the grounds that Rita lacked testamentary capacity to execute the will, which was executed on September 15, 2021, eleven days before her death. Michael alleged Rita was unduly influenced to execute the will. Undue influence can invalidate a will or contract when one party is unable to exercise his or her independent volition freely.

The county court determined the will was the product of undue influence and ordered that Rita's property proceed intestate, appointing Michael as personal representative. However, on appeal, the Nebraska Supreme Court held that the lower court erred in excluding evidence of Rita's prior will, signed in February of 2016. While this document was hearsay because it was not a statement of Mark himself, it fell within a hearsay exception and was relevant. The prior will served to demonstrate Rita's "constant and abiding scheme" for her property and was relevant to Rita's testamentary capacity at the time of the subsequent will's execution.

Therefore, the Nebraska Supreme Court reversed the lower court's rejection of Rita's will and remanded the case to the lower court to re-examine the issues of testamentary capacity and undue influence in consideration of Rita's prior will.

This ruling serves as a reminder to prioritize comprehensive estate planning methods to mitigate the risk of courts rejecting valid estate planning documents. Recognizing and addressing the risk that your will may be vulnerable to allegations of undue influence is crucial to ensuring your final wishes are honored.

Estate Planning and Bitcoin: What you need to know

If you follow financial news, have seen a commercial where everyone from Tom Brady to Kim Kardashian has been marketing cryptocurrency, or have heard tales from a friend or neighbor who hit it big with Bitcoin----you know cryptocurrency has become mainstream in 2023. With stories like the collapse of FTX and the volatility of Bitcoin prices garnering significant media coverage over the prior year, Bitcoin and cryptocurrency have also caught the attention of estate planners.

While planning for the transfer of a family farm or Berkshire Hathaway stock has been discussed for generations in estate planning meetings in Nebraska, Bitcoin’s relative newness and digital nature have created challenges for estate planning purposes. As a virtual asset, Bitcoin is often stored in an app on a smartphone ---heavily protected by passwords and keys---which makes it more likely that your heirs may overlook any Bitcoin or crypto account you own. 

Further complicating matters, Bitcoin Wallets do not allow the transfer of the wallet into the name of a Trust. In addition, many well-known crypto exchanges do not currently offer any beneficiary designations--- like POD (payable on death) or TOD (transferable on death). Thus, there are some important considerations when planning for the transfer of your cryptocurrency:

• Ensure that your estate plan specifically references your Bitcoin or cryptocurrency and provides for a secure transfer method to your heirs. The solution may be crafting a detailed letter of instruction to your successor trustee or personal representative with details on how to access and transfer your cryptocurrency.

• Name a beneficiary for your crypto assets in your estate plan. A beneficiary is the person or organization you want to inherit an asset. Make sure to list all your crypto assets in your estate plan, where the assets are stored, and which beneficiaries should receive them.

• You could also name a separate digital trustee in your estate plan---- and entrust this digital representative with protecting and transferring your cryptocurrency. A person with some experience, expertise, and knowledge in handling digital assets could make the administration of your estate much more efficient. 

As large-scale institutions and exchanges begin to enter cryptocurrency and new laws and regulations come into effect, it would be wise to revisit your estate plan to ensure that your nominated trustee can access and effectively transfer your cryptocurrency without unnecessary cost and delay.

If you have questions or are interested in reviewing your current estate plan, please get in touch with any of our experienced estate planning attorneys at Erickson & Sederstrom.

Estate Planning is for Everyone

Who needs an estate plan? All people, including young adults, seniors, single people, and people with families, can benefit from an estate plan. While these groups may benefit differently from certain aspects of an estate plan, it is important that all people have a clear plan for their estate.

Estate plans typically include a testamentary instrument, such as a last will and testament, or a trust, and health and financial powers of attorney. What comprises a person’s estate plan can vary based on their specific needs and circumstances. Any estate plan should answer the following questions:

Who cares for you?

• Designating someone to serve as your financial and health power of attorney, and guardian and conservator, if necessary, ensures that someone of your own choosing makes decisions for you if you become incapacitated.  

Who cares for your children?

• Nominating a guardian, which is the protector of the person, and a conservator, which is the protector of financial resources, for your minor children or children with special needs assures that the courts know exactly who you choose to take care of your loved ones.

Who manages your estate once you have passed away?

• Nominating a personal representative or trustee to manage your affairs makes sure that someone you trust will manage your estate and follow your estate plan in accordance with your wishes.

Who receives your assets and how are those assets are received?

• Selecting the people or charities who will receive the gifts from your estate and determining whether those gifts are distributed right away or held for future distribution ensures specific life circumstances of each beneficiary of your estate are fully considered.

Most of these issues impact people regardless of age or wealth. Everyone must determine who will care for them and who will benefit from their assets once they have passed away. The goals of an estate plan are to reduce uncertainty, mitigate risks, and ensure the efficient transfer of assets to beneficiaries. Having a meaningful estate plan allows you to confidently answer the above questions and alleviate potential risks and uncertainties for your loved ones after your passing.

Mark Matulka assists people with estate planning and estate administration. Mark can be reached at (402) 397-2200 or matulka@eslaw.com.

Joseph C. Byam and Joseph C. Byam II Join Erickson | Sederstrom Team

Erickson | Sederstrom is pleased to announce that attorneys Joseph C. Byam and Joseph C. Byam II, from the law firm of Byam & Hoarty, have joined the firm.

“Erickson | Sederstrom is a long-standing Nebraska firm that has attorneys who specialize in numerous practice areas. The merger will allow us to provide our clients with the depth of these practice areas, and the experience and expertise of the attorneys who practice in these areas. We think it is a great fit and are excited to get started,” says Joseph C. Byam II.

Joseph C. Byam will serve as Of Counsel to the firm, and continue to assist clients in estate planning, probate, and general business and corporate matters. 

Joseph C. Byam II will join the firm as an Associate working in the areas of estate planning. His practice includes preparing estate plans, trust administration, probate of estates, and issues related to both federal and state inheritance tax. He also advises clients in corporate or company formations.

Erickson | Sederstrom welcomes the addition of attorneys Joseph C. Byam and Joseph C. Byam II to their team.

Understanding Nebraska’s Medicaid Estate Recovery

An important part of estate planning is preparing for the recovery of any Medicaid assistance, especially if you or your spouse are over age 55 and have received any Medicaid benefits.   

Medicaid is a federal and state partnership that helps people with limited resources and income pay for health and long-term care costs. People over age 55 usually receive Medicaid funding for nursing facility services, home and community-based services, and related hospital and prescription drug services. 

There is a common misconception that once a person has exhausted their personal financial resources in paying for the cost of their health and long-term care, then Medicaid funding will continue paying for care at no cost to the person. While it is true that Medicaid will begin covering certain health expenses once a person meets asset and resource requirements, Medicaid funding is more of a loan, not a cost-free grant of funding. 

Because certain assets, such as a house, are disregarded when determining whether a person qualifies for Medicaid, federal and Nebraska law requires the Nebraska Department of Health and Human Services (DHHS) to recover any Medicaid expenses. The debt of Medicaid expenses arises during the recipient's lifetime; however, DHHS only seeks recovery after the recipient's death or the death of the recipient’s spouse. The outstanding debt is recovered from the former Medicaid recipient’s estate through a process known as Medicaid Estate Recovery. 

If a Medicaid recipient was 55 years of age or older, then their assets after death are subject to Medicaid Estate Recovery. Like with most rules, there are exceptions. First, DHHS cannot recover costs of Medicaid assistance provided to a recipient under the age of 55 unless the recipient permanently resided in a medical institution. Second, DHHS cannot recover costs if the deceased recipient is survived by a spouse, a child under 21, or a dependent regardless of age who is blind or permanently disabled. 

After a Medicaid recipient passes away, DHHS works with families, attorneys, and courts to recover funds for the Nebraska Medicaid Program.  In Nebraska, DHHS acts as a creditor with a claim against the assets or estate of a decedent; however, DHHS usually does not place liens on specific property for purposes of Medicaid Estate Recovery.  While a former Medicaid recipient’s assets and estate are subject to recovery, the recipient’s heirs may seek an exemption or reduction if recovery would create a hardship.  

Planning for Medicaid Estate Recovery is critical if you or your spouse are over the age of 55 and have received any Medicaid benefits.  If you have any questions about Medicaid Estate Recovery and how it may impact your estate plan, please reach out to any of the highly knowledgeable and experienced estate planning attorneys at Erickson | Sederstrom at (402) 397-2200.

Nebraska Inheritance Tax Updates

Although Nebraska does not currently have an estate tax, it does still impose an inheritance tax. The Nebraska inheritance tax applies to an individual who (1) dies a resident of Nebraska, or (2) regardless of residency, an individual who owns real property in Nebraska at the time of their death. The inheritance tax must be filed in and paid to the county in which the decedent resided or within the county in which his or her real property was located. The inheritance tax is due and payable within twelve (12) months of the decedent’s date of death, and failure to timely file and pay the requisite tax may result in interest and penalties.

The tax rate and applicable exemption amount varies based on the degree of kinship between the decedent and the respective beneficiary. Now for some good news. On February 17, 2022, Legislative Bill 310 was signed into law. The new law effectively reduces inheritance tax rates and increased inheritance tax exemptions for deaths occurring in 2023 and beyond. 

Currently, spouses receive a full exemption from paying Nebraska inheritance taxes, and they will continue to be exempt under the new law. In addition, the inheritance tax will not apply to transfers to individuals twenty-one (21) years or younger, and there is no tax imposed upon property passing to an entity organized exclusively for religious, charitable, public, scientific, or educational purposes. Beyond that, the Nebraska inheritance tax is as follows:

Transfers to immediate family members other than the surviving spouse -- The tax rate on transfers to immediate relatives (e.g., children, grandchildren, siblings, parents, etc.) will remain 1%, however, the exemption amount will increase from $40,000 to $100,000, per beneficiary. 

Transfers to more remote family members -- The tax rate on transfers to remote relatives (e.g. aunts, uncles, nieces, and nephews) will be reduced from 13% to 11%, and the exemption amount will increase from $15,000 to $40,000, per beneficiary. 

Transfers to unrelated persons -- The tax rate on transfers to unrelated individuals will be reduced from 18% to 15% and the exemption amount will increase from $10,000 to $25,000, per beneficiary.

If you have questions regarding Nebraska inheritance taxes, the aforementioned updates, or are interested in reviewing your current estate plan in light of these changes, please reach out to any of the highly knowledgeable and experienced estate planning attorneys at Erickson & Sederstrom.

Don’t Forget the Basics Estate Planning is About People

Estate planning attorneys and clients are once again awaiting possible sweeping changes in estate taxation. Will the cherished step-up in cost basis of capital assets go away? Will unrealized capital gains be recognized at death? What will the exclusion amounts be for federal estate tax? At the moment, answers are murky at best.

These are undoubtedly big changes being considered by Congress. But what can a client do in the meantime? The answer is simple: mind to the basic building blocks of your estate plan. The basics aren’t sexy. But they are crucial elements to your plan. This is the first in a series of articles which will examine the crucial but often overlooked decisions that make or break an estate plan.

What is the first essential building block of an estate plan? Is it the power of attorney? The last will? Maybe a trust? These are all good tools, but in the end, they are just ink on paper. Estate plans are not self-executing. We rely on people to carry them out. Your will may direct that a certain piece of property be given to so and so, but it takes a living, breathing person to secure, safeguard, account for, and physically deliver that property to the intended beneficiary. Thus, the selection and ongoing review of these critical players in your estate plan deserves careful consideration.

The challenge is that people and relationships change, often quickly. Our skills, temperaments, and relationships with others are constantly in flux. The person you entrusted five years ago to oversee your estate or serve as your power of attorney may now be unsuitable for a host of reasons that you could not have foreseen.

To address this, I recommend that my clients critically review their estate plan each year with a special focus on the people they’ve chosen to serve in these roles. I encourage them to ask themselves the following questions:

o Are the people I’ve appointed as my children’s guardian, my trustee, executor, or agents under my power of attorney still the best choices to ensure my wishes are carried out? Are any of them experiencing health issues, marriage problems, addiction issues, or other major life distractions that they were not experiencing when I first named them as a fiduciary? Do I still trust these individuals as I once did?

o What natural skills do each of these individuals exhibit? Who in my life exhibits the key characteristics of a fiduciary, namely trustworthiness, organization, and accountability?

o Do the people I’ve currently nominated to serve as fiduciaries reflect outdated or faulty notions? For example, did I nominate my son to be my Power of Attorney only because he lives in close proximity to me when another child of mine who lives far away might actually be better suited? Or, did I nominate my oldest daughter to serve as my Successor Trustee because I was afraid of hurting her feelings?

o Whom do I really trust to make personal medical decisions for me if I am incapacitated?

o Have I given enough consideration to the alternate fiduciaries who may be called upon if my first choice is unable to serve?

o What are my children’s relationships like with each other? Are they harmonious? Contentious? If I elevate one of my children to administer my estate at my death or be my primary medical decision maker, will it lead to unnecessary strife or litigation?

These can be messy questions indeed. Don’t breeze past the identification of the proper people to carry out your estate plan or protect you in the case of an incapacity. Talk with your attorney, review whom you have selected to fill these roles, and make appropriate changes as necessary. It’s worth a modest invoice from your attorney to ensure the people with the right skills and temperament are in place.

Please contact E|S trust and estate attorneys with questions on how to approach your own comprehensive estate plan to fit your needs.

Homestead Exemption & Transfer on Death Deeds

In Chambers v. Bringenberg, a recent matter of first impression, the Nebraska Supreme Court reversed the decision of the district court and held that a transfer on death (“TOD”) deed did not fall under the plain language of a statute governing homestead conveyances. See Chambers v. Bringenberg, 309 Neb. 888 (2021).  Therefore, in the case where a homestead was owned by one spouse, the TOD deed executed by the owner-spouse did not require the non-owner spouse to execute or acknowledge the deed for it to be valid. 

This case arose when a surviving husband, David Chambers, brought an action challenging a TOD deed executed by his wife, Eleanor Chambers, before her death. On February 8, 2018, Eleanor recorded a TOD deed for a home she purchased solely in her name and chose her daughter, Angie, as the designated beneficiary. At this time, David neither executed nor acknowledged the TOD deed.

In contending the transfer to Angie was invalid, David relied on Nebraska Revised Statute § 40-104, also known as the homestead statute, which provides that the “homestead of a married person cannot be conveyed or encumbered unless the instrument by which it is conveyed or encumbered is executed and acknowledged by both spouses.” Neb. Rev. Stat. § 40-104 (emphasis added). David argued he was the rightful owner of the home because he did not execute or acknowledge Eleanor’s TOD deed.

The district court found in favor of David on this issue, reasoning that Eleanor’s TOD deed was void because Eleanor was a “married person” who lived at the home in question, and it was therefore “the homestead of a married person” subject to the homestead statute. Accordingly, the district court found the TOD deed was invalid because David did not execute and acknowledge the deed as required under the homestead statute.

In reversing the district court’s decision, the Nebraska Supreme Court considered, as an issue of first impression, whether § 40-104, the homestead statute, applied to TOD deeds.

In its analysis, the court first noted that under the Nebraska Uniform Real Property Transfer on Death Act (“TODA”), a transfer of property through a TOD deed “is effective at the transferor’s death” and “[n]othing in the TODA expressly contemplates any circumstance under which the TOD deed of a married grantor must contain the spouse’s execution and acknowledgment in order to be valid.” Id. at 906. Additionally, the conveyance statutes that are incorporated by reference into the TODA make no reference to homestead protections.

The court acknowledged that “even when both spouses have a homestead interest in the real estate,” it has never previously held “that a spouse cannot validly devise an ownership interest in homestead property without the other spouse executing and acknowledging the will.” Id. at 912. However, the court found that the requirement under the homestead statute did not apply to TOD deeds because, under the plain language of the statute, the words “convey,” “grant,” and “encumbrance” all connotate that the instrument has an inter-vivos effect, where the transfer is made during one’s life. In contrast, the language in the TODA describes a “transfer” between a “transferor” and a “beneficiary” and is the language of a devise, or the passing of title of real estate upon death.

Based on the foregoing, the court ultimately held a TOD deed does not fall under the plain language of the homestead statute because “[w]hat occurs upon a transferor’s death to property that is the subject of a TOD deed is not a conveyance or an encumbrance, but a devise.” Therefore, David’s execution and acknowledgment of Eleanor’s TOD deed was not necessary.

Call Erickson | Sederstrom’s estate planning attorneys with questions on TOD deeds, wills or trusts, or related matters at 402-397-2200 and ask for Andrew Huettner, Dan Dittman, or Michelle Daniels.

Why Everyone Needs A Comprehensive Estate Plan

You have likely already made a diligent effort to choose a knowledgeable financial advisor and create a sound financial plan, whether that means starting a college savings fund for your children or saving for retirement. However, more than likely, the financial plan you built with your financial advisor does not necessarily consider what you want to happen in the event of your incapacity or upon your death.  So, what happens to a Nebraska resident that does not have these important estate planning documents?  

The state of Nebraska, in its generosity, creates a “will” on your behalf, and the laws of intestacy dictate who gets what. But what does Nebraska law really say? Well, that all depends on your then living heirs and the total value of your estate. For example, if you are a married person with no children, Nebraska law says the first $100,000.00 plus one-half of your remaining assets go to your surviving spouse, and the balance of your assets go to your parents. For a married person with children, Nebraska law says the first $100,000.00 plus one-half of your remaining assets go to your surviving spouse, and the balance of your assets get distributed equally amongst your children, so long as all your children are also children of your surviving spouse. 

If these state laws surprise you, or if they do not reflect the plan you envisioned, do not let the State of Nebraska dictate these things for you.  Be diligent in your planning and consider executing these very important documents, not only for yourself, but also for your loved ones. 

When it comes to estate planning, most people are familiar with the concept of a Will. However, in addition to a Will, there are many other essential documents that you should consider, and we will discuss each in greater detail below.  

Last Will and Testament. What comes as a surprise to many is the fact that a Will is much more than just an instrument detailing who you want to inherit your property. A Will is a legally enforceable document stating the “who, what, and when” upon your death. In a Will, you will consider things such as: 

1. How your estate will be distributed;

2. Whether you want to include any bequests to specific individuals or charities, or in the alternative, whether there are individuals you would like to disinherit;

3. Who you want to take care of your minor children, if any;

4. At what age or ages you want your children to receive their inheritance and whether you want to set conditions for asset distribution;

5. Who you want to wind up your affairs and handle your property after death; and

6. Where you want your property to go in the event you die without any living descendants (i.e. children, grandchildren, etc.)

 Power of Attorney. Although this document may take many forms, all Power of Attorney documents allow another person to make decisions on your behalf during your lifetime. Giving a person you trust a power of attorney gives them the ability to advocate for your medical needs or make necessary legal and financial decisions for you.

 An agent under a Durable Power of Attorney for Financial Affairs (“Financial DPA”) is appointed by you to act on your behalf regarding your property, business, and financial affairs, among other things. Your agent is legally permitted to perform acts that you designate, whether that be limited powers, or all powers to the fullest extent allowed under the law.  An example of such powers includes simple tasks, such as paying bills and depositing checks, or more complicated tasks, such as managing your real estate, investments, or business interests. Unless expressly stated in the document, the agent may act even while you, the principal, have capacity.

 Should you not have a Financial DPA in force in the event of an incapacity, it is very possible that your family will need to petition the court and ask a judge to establish a conservatorship for you. In addition to being labor intensive, court proceedings are also costly and typically require the assistance of an attorney.  Oftentimes, the situation that calls for a conservatorship also requires immediate action. Of course, as with all fiduciary appointments, who you name as your agent needs thoughtful consideration, such as whether the person is capable of managing your assets, can be diligent when carrying out actions, and fully understands your wishes.  Furthermore, you must consider who you want to serve as a back-up in the event the primary agent is unable or unwilling to fulfill the role.

 An agent under a Health Care Durable Power of Attorney (“Health Care DPA”) is appointed to make health care decisions for you in the event you are unable to make health care decisions for yourself. If you want the agent to have authority regarding life-sustaining treatment, the authority must be expressly stated in the Health Care DPA.  In the alternative, you may choose to execute a Living Will and expressly state your wishes to refuse life-sustaining treatment.  You may also express your wishes regarding organ donation within the Health Care DPA. 

 If you have questions regarding the aforementioned documents, or are interested in more information about Trusts (which is another highly sought-after method of estate transfer), please reach out to any of Erickson & Sederstrom’s highly knowledgeable and experienced estate planning attorneys at (402) 397-2200.

Erickson|Sederstrom Elects Matt Quandt and Shay Garvin as Partners; Connor Orr Joins the Firm

ERICKSON | SEDERSTROM is pleased to announce that MATTHEW D. QUANDT and SHAY GARVIN have been elected Partners and CONNOR W. ORR has joined the firm as an Associate.

Matt has been with the firm for two years, before which he litigated at a reputable Kansas City firm. His practice focuses on civil litigation, including catastrophic injury and wrongful death, trucking and transportation, construction defect, product liability, and professional liability. He is also a member of TIDA (the Trucking Industry Defense Association). He received his J.D. from the Washburn University School of Law (cum laude) and his B.S. from Baker University (cum laude). He is admitted to practice law in the state and federal courts of Nebraska, Kansas, and Missouri.

Shay has been with the firm since 2019. Prior to joining Erickson | Sederstrom, he practiced for several years with a nationally recognized firm in Lincoln. Shay focuses his practice on transactional areas, including mergers and acquisitions, business formation, securities offerings, debt and equity financing, and general counsel. Shay also has extensive experience in the transportation industry and is active in the Nebraska logistics community. He received his J.D. and M.B.A. in 2015 from the University of Nebraska and his B.A./B.S. from the University of Arizona. He is admitted to practice law in Nebraska.

Connor has joined the firm representing both individual and commercial clients for litigation and general counsel matters. Connor graduated from Creighton University Magna Cum Laude in 2014 with a Bachelor’s degree in Economics, then went on to obtain his Juris Doctorate from the Creighton University School of Law in 2017. He is a member of both the Nebraska and Iowa State bars, and has extensive litigation experience representing clients in both state and federal courts for matters including commercial contract disputes, insurance defense, personal injury, construction defects, product liability, wrongful death, trucking and transportation, and disputes concerning both commercial and residential real estate. He also has experience providing estate and business planning services, providing advice to help guide families and small, local business owners through both prosperous and difficult times.

Common Misconceptions About Wills and Probate

Traditionally, most people think of a will as the vehicle that transfers all of a person’s property upon their death; however, wills do not always pass ownership of everything. Trusts, transfer on death deeds, beneficiary designations, and joint accounts with rights of survivorship are also tools that transfer ownership of property upon death. For example, most retirement plans pass to a named beneficiary. Many bank accounts pass to a joint tenant with rights of survivorship or to a payable on death beneficiary. Nebraska has also adopted another method of transferring ownership of real estate upon the death of the owner through the use of a transfer on death deed. All of the aforementioned examples pass outside the terms of a will.

Another common misconception is how wills work and when they go into effect. Wills do not go into effect until the will has been admitted to probate. Probate is a court-supervised legal process that occurs in the county court where the decedent resided and is typically required to administer a person’s estate after their death. After the will is validated by the court, the court must also appoint a personal representative (or executor) to oversee and manage all estate assets. Therefore, just having a will and naming someone as your personal representative does not automatically deem the will to be valid and allow the person named in the document to jump right in and start transferring property.

It is also important when meeting with your estate planning attorney that you do not limit the discussion to your will or who gets your assets upon death. Planning for a disability or incapacity during your lifetime is also a very important aspect of planning for your future.

Whether you are exploring the idea of estate planning for the first time or you have had a plan in place for years, we would welcome the opportunity to take a fresh look at your situation to ensure that every piece of your estate plan fits with your overall financial picture and goals.

This article does not create or constitute an attorney-client relationship and is not intended to convey or constitute legal advice. It is important to speak with a qualified professional regarding your specific matter prior to taking any action.

Structuring the Sale of a Business

Selling Assets Versus Equity

One of the more critical initial items to consider when selling a business is determining whether the sale involves selling the equity or assets of the business.  The choice of structure will have an impact on several items, including, (i) the tax consequences to each of the buyer and seller, (ii) the party responsible for the company’s liabilities, and (iii) third-party consents required to consummate the transaction.  In many cases, the buyer and seller will benefit differently depending on the structure, so it is important for the seller of a business to fully understand the impact of each structure.  This article will briefly describe the mechanics of an asset sale and equity sale, and then discuss some important items that are implicated depending on the chosen structure.  

Equity Sales

 A sale of equity involves the buyer, which may be an individual, group of individuals, or a company, purchasing the stock (in the case of a corporation) or interests (in the case of an LLC or partnership) of the business directly from the owner(s) of the equity.  After the sale of the equity is consummated, the  buyer takes the entire business as a whole, including all of the business’s assets and liabilities.

Diagram 1 shows the structure of a proposed equity sale.  Note that ABC, LLC is the target company and owned by the seller prior to the sale.   The buyer is proposing to transfer cash to the seller in order to purchase the equity of ABC, LLC.  Diagram 2 shows the results of the transaction after the closing, with the buyer owning the equity of ABC, LLC and the seller now holding the cash from the buyer.  Note that the buyer takes ABC, LLC with all of the assets and liabilities of the company and, except as may be agreed between the buyer and seller, the company is still responsible for satisfying all of the liabilities it had when it was owned by the seller.

Asset Sales

In contrast to an equity sale, a sale of the assets of a business involves the buyer (almost always an entity) purchasing only certain assets and assuming only certain liabilities of the target company.  After the sale is consummated, the target company retains any unpurchased assets and liabilities that were not assumed by the buyer.

Diagram 3 shows the structure of a proposed asset sale.  Note that ABC, LLC is the target company and the buyer is proposing to transfer cash to the target company in order to purchase certain assets and assume certain liabilities of ABC, LLC.  Diagram 4 shows the results of the transaction after the closing, with the buyer owning the purchased assets and liabilities and the target company now holding the cash from the buyer, as well as certain retained assets and liabilities.  This is an important distinction from an equity sale since the cash generated from the asset sale may now need to be used to pay off certain retained liabilities.

Impact of Structure

Tax Consequences

In an asset sale of a business with significant depreciable assets, the buyer will often receive a tax benefit while the seller may experience a tax disadvantage.  This is because the purchase price in such an asset sale is often greater than the basis of the depreciable assets.  This allows the buyer to receive a stepped-up basis in such assets and further depreciate the assets to reduce the buyer’s income.  Meanwhile, the seller will have to pay taxes at the ordinary income rate for the difference between the assets’ basis and the purchase price.

In an asset sale without significant depreciable assets, the tax benefit to the buyer (and disadvantage to the seller) will generally be much lower.

In an equity sale, the seller typically receives a tax advantage because in most equity sales, the equity that is sold receives tax treatment as a capital gain (which is taxed at a lower tax rate than ordinary income). State rates for capital gains vary by state. In Nebraska, capital gains may be avoided altogether through the use of certain tax planning strategies.

There are also certain tax elections that may apply to some transactions that can provide benefits to both the buyer and seller.  For example, a 338(h)(10) election made in connection with the sale of stock allows a seller to receive capital gains tax rates on the sale and the buyer to receive a stepped-up basis in the assets. 

Treatment of Liabilities

As touched on above, in a sale of equity, all of the liabilities of the target company stay with the target company after the sale.  This means that the seller of equity generally does not have to worry about responsibility for further liabilities of the company after the sale (although the seller will likely have agreed to backstop the buyer for certain undisclosed liabilities that may arise for some period after the closing). 

Contrast this with an asset sale, where the buyer of the assets generally takes few liabilities.  This means that the seller of the assets will remain responsible for future liabilities of the target company, and owners of the target company may thereafter remain liable for several years after dissolution. This is why asset sales are generally preferred by buyers and equity sales are generally preferred by sellers.

Assignment of Intangible Assets

In a sale of equity,  contracts (such as leases, customer agreements, etc.) transfer with the target company by operation of law.  This means that, unless any contracts have restrictions on a change of control of the target company, there is no need to obtain the consent of contract counterparties in order to consummate the transaction. 

However, in a sale of assets, such transfer does not occur automatically, and most contracts will have a restriction on assignment without the consent of the counterparty.  This can take considerable effort depending on the number of consents that are needed, and may jeopardize the confidentiality of the transaction.  Thus, all other items being equal, a sale of equity is generally preferential if the target company has a large number of material contracts.

The bottom line is that the choice of transaction structure can have a significant impact on the pre-closing duties and post-closing obligations of the parties and have a direct effect on the amount of cash that the seller ultimately receives from the transaction. Thus, any business owner should seek competent legal advice to understand the risks and benefits of various transaction structures very early on in a potential sale process.

What Is the SECURE Act and How Could It Affect Your Estate Planning?

The SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement,” enacted numerous provisions that may impact your estate plan beginning January 1, 2020. Perhaps the most noteworthy provision in the realm of estate planning relates to inherited retirement accounts. The previous rule, often referred to as the “stretch IRA,” allowed individuals inheriting retirement accounts to stretch out required minimum distributions (RMDs) over their own lifetimes. The new provision implemented by the SECURE Act, which will apply only to account holders dying on or after January 1, 2020, eliminates the stretch distribution, and will now require a full payout of the inherited IRA within 10 years of the original account holder’s death. Although there are limited exceptions to this rule, such as inherited retirement accounts collected by the surviving spouse of the decedent, the SECURE Act will undeniably have a significant impact on many estate plans. The implications will vary and could have very different consequences depending on each individual’s goals and assets held inside IRAs.

Other notable ways the SECURE Act may impact your retirement include an increase in the age that triggers required minimum distributions ("RMDs") from 70½ to 72, as well as repealing the age-based restriction on contributions, which means individuals may now make contributions to a traditional IRA for an indefinite period. The SECURE Act contains several other tax-advantageous provisions for both individuals and employers, such as including part-time employee participation in 401(k) plans. These changes were designed to ultimately strengthen retirement security nationwide.

For more information regarding the Secure Act or any other related matters, please reach out directly to Michelle J. Daniels, William T. Foley, or any of the other experienced attorneys at Erickson | Sederstrom.

This article does not create or constitute an attorney-client relationship and is not intended to convey or constitute legal advice. It is important to speak with a qualified professional regarding your specific matter prior to taking any action.

What Happens To My Online Accounts When I Die?

The 2017 Nebraska Revised Uniform Fiduciary Access to Digital Assets Act now allows an individual to provide for their electronic assets in an estate plan. 

        Nebraska, along with over 30 other states, enacted a law which discusses what happens to digital assets after death. The Nebraska Revised Uniform Fiduciary Access to Digital Assets Act (“the Act”) went into effect January 1, 2017, and provides guidance concerning how a fiduciary (e.g. Trustee, Personal Representative) may gain access to the digital devices of a deceased user.

        So what does the Act really mean for you? It’s simple. You can now grant someone the absolute authority to control any and all Digital Devices and digital information in your estate plan.  This, in turn, will provide an easier avenue for a specified individual to gain access to accounts and will grant them with widespread power over your digital devices, whether for the purpose of continuing your business efforts, settling your affairs, or to simply collect lifelong memories. 

        Let’s take a moment to reflect on all the ways we rely on the internet and different online applications in our daily lives.  Some may conduct significant business transactions via PayPal and Gmail; while others may market services, acquire clientele and procure payment through social media accounts, such as Etsy, Twitter, Facebook, and Instagram. Although every person uses technology in varying ways and for different reasons, many do not consider what happens to their digital records upon death.  

       Prior to the enactment of the Act, unless you left a specific person with all your username and password information prior to death, it was common for an individual to have to jump through quite a few hoops if they wanted to acquire access to and control of “digital assets” and digital information of a deceased user from the corresponding provider.  In essence, this meant that even after someone died, many of their digital assets continued to exist, leaving no one the power to access, modify, delete, control or transfer any digital information or communications. If the internet plays such an abundant role in our day-to-day lives, why do we put such a huge emphasis on planning for all other aspects of our lives, but not for this one? After all, time is money, and the effort spent gaining access to an account could undeniably be better spent actually running the account.

        It is also important to note that arrangement for your digital assets is only one aspect of estate planning. Incapacity issues, asset protection for you and for beneficiaries, avoiding probate, and minimizing income taxes are all other aims that can be achieved with proper planning.  In addition, changes in your family or to your assets may render your current estate plan outdated. Therefore, we welcome the opportunity to meet and to discuss all of these matters to ensure that your estate plan reflects your current objectives. 

        For more information on the Nebraska Revised Uniform Fiduciary Access to Digital Assets Act, how to provide for the Act in your estate plan, or any other matters relating to estate planning and probate, please contact Michelle J. Daniels with Erickson | Sederstrom.
 

Divorce’s Impact on Estate Plans in Nebraska

    On September 3, 2017, Nebraska LB 517 went into effect. The passing of this bill has resulted in the enactment of Nebraska Revised Statute §30-2333, titled “Revocation by divorce or annulment; no revocation by other changes of circumstances.” What exactly does this mean? Well, absent a court order, express terms of a governing instrument, or contract relating to the division of the marital estate, it means a few different things.
   First, a divorce or annulment revokes any revocable transfer or appointment of property made by a divorced individual to his or her former spouse, or to a relative of his or her former spouse. For instance, let's say Spouse 1 is both the owner and insured of a life insurance policy that lists Spouse 2 as the primary beneficiary. In the event Spouse 1 and Spouse 2 legally divorce, Spouse 2 is no longer treated as the primary beneficiary of said policy, assuming the contrary is not specified under the policy, by court order, or by other contractual agreement between the parties.  In this case, the provisions of the life insurance policy are given effect as if Spouse 2 disclaimed all interest in the life insurance policy. The same principle applies to accounts with payable on death designations, last wills, interests in certain trusts, pensions, retirement plans, transfer on death deeds, annuity policies, profit-sharing plans, etc.  
    Also revoked by a divorce or annulment is any revocable provision giving the former spouse, or relative of the former spouse, a general or non-general power of appointment. An individual's estate planning documents often contain such powers of appointment. Also found in estate planning documents are nominations of certain fiduciaries. Any revocable nomination of the former spouse, or relative of the former spouse, as a fiduciary or representative is revoked upon divorce or annulment. Examples of potential nominations include an executor, trustee, guardian or power of attorney.
    Next, a divorce or annulment severs any interest in property held together by former spouses as joint tenants with a right of survivorship at the time of the divorce or annulment. The former spouses then become equal tenants in common.  What does “joint tenants with a right of survivorship” mean? Let’s say you have Spouse 1 and Spouse 2 and they own property together as joint tenants with a right of survivorship. Now if Spouse 1 dies, Spouse 2 automatically obtains the percentage of the property previously held by Spouse 2. Now what about “equal tenants in common”? Now you have Spouse 1 and Spouse 2 and this time they get a divorce. Upon the divorce, Spouse 1 and Spouse 2 both have equal shares in the property, and upon the later death of one spouse, the surviving spouse no longer has a right to the deceased spouse's interest in the property. Again, it is important to note that these are default rules absent express terms of a governing instrument, court order, or other property settlement agreement.  Also, unless there has been a writing declaring the severance and the writing was noted, registered, filed, or recorded in appropriate records, this severance does not affect a purchaser’s interest in the property so long as the purchaser purchased it for value and in good faith relied on the fact that the title was in survivorship in the survivor of the former spouses. 
    Also, it is important to note that a decree of legal separation is not considered a divorce or annulment for purposes of this statute. Moreover, provisions revoked solely by this statue are revived by the divorced individual's remarriage to the former spouse or by nullification of the divorce or annulment.
    How are third parties affected by this statute? A third party is not liable for making payment or transferring property to a beneficiary designated in a governing instrument that is affected by the divorce, annulment, or remarriage, or for taking any other action in good faith reliance on the validity of the governing instrument, before such third party receives notice. If a third party receives written notice of the divorce, annulment, or remarriage, the third party then becomes liable for payments or action taken regarding the property after said notice.  Finally, a former spouse, relative of a former spouse, or other person who received, without giving value in return, a payment, an item of property, or any other benefit to which that person is not entitled under this section is obligated to return the payment, item of property, or benefit, or is personally liable for the amount of the payment or the value of the item of property or benefit, to the person who is entitled to it.