Did You Choose the Wrong Business Type?
Picking what kind of business you’re going to be – “choice of entity” – is one of the first and most important things you do when you start a business. It’s an area where many business owners can get into trouble because they don’t know what they don’t know. Beyond basic issues of personal liability and how many people are in your company, there are subtleties you may miss if you don’t know the law.
Here are some common business types, and why they may be the wrong choice for your business. (If you think you’ve already set up your business as the wrong entity, don’t worry; Gem and his associates can help you.)
Sole proprietors and partnerships
The benefits of sole proprietorship and partnerships
Many businesses default to these business types because they don’t require any formal federal or state paperwork to set up. (You should still look into whether you need licenses and permits, though.) If you start selling baby blankets online and making money, you’re automatically a sole proprietor. If you and your buddies start roasting coffee and selling it, you’re in a partnership. It’s very easy, which is why these are still very common business structures.
What to watch out for
The major drawback – and it’s a big one – of being one of these two types of business entity is that you have no liability protection. Your personal assets are not protected in case your business is sued or goes into debt. That means that you can lose your money, your home, your car, and any other assets you have if the business gets into trouble. For partnerships, you take even more risk, because you’re not just reliable for your own actions and debts you incur, you’re liable for those of your partners, too.
The bottom line
It’s better to choose a different business structure altogether than to accept the risk of putting your personal assets on the line.
Limited liability companies (LLCs)
The benefits of LLCs
The big benefit is liability protection. With an LLC, as long as you maintain a separation between business and personal accounts, you will be (in most cases) protected from being held personally liable for the debts of your business. An LLC is flexible because you can have a single-person LLC or an LLC with multiple people. For taxes, the income (or loss) “passes through” to the owners to include on their personal tax returns.
For all these reasons, the LLC is an ideal business structure for many companies.
What to watch out for
With LLCs, there’s more than meets the eye. Did you know that there are four ways to establish a limited liability company in South Carolina? Most people don’t. And when most people set up the business themselves, they inadvertently set it up as the wrong type of LLC.
An LLC can either be “term” or “at will” and can be “member managed” or “manager managed.” Let’s say you and your friend are in an LLC together and you don’t yet have a buy-sell agreement. If your friend dies, and your LLC is set up as “at will” instead of “term,” you have only a limited time to buy out their portion of the business, or the business dissolves.
Or let’s say you’re in an LLC with your business partner and your LLC is set up as “member managed.” Even if that person owns just 1% of the business, they can go to the bank and take out money in your company’s name, which you’re now on the hook for.
The bottom line
The LLC is a great business structure, but you need to make sure it’s set up as the correct type of LLC. There are four possible types of LLC, and only one is ideal.
Corporations
The benefits of corporations
As a business entity, the corporation is great because it’s robust and can grow easily with capital from investors. Most of the brand name companies you know are corporations. You can choose to be a C-Corp or an S-Corp depending on how you want to be taxed. This is a great choice for a company looking to grow with outside investors and shareholders.
What to watch out for
If you’re a regular corporation, you’ll be required to have a board of directors, hold regular meetings, keep meeting minutes, and have those minutes available to shareholders to review. Failure to do these things can lead to a Plaintiff’s lawyer asking a court to “pierce the corporate veil” when the company is sued. That is, blurring the line between what’s business and what’s personal. In the worst-case scenario, you could be personally liable and find yourself paying off the company’s debts with your own assets.
But you can sidestep these problems entirely by electing to become a “statutory close corporation” by filing with the State of South Carolina. Every corporation in South Carolina is eligible. You get the benefits of being a corporation, but you won’t be required to have a board of directors and hold meetings if you don’t want to.
The bottom line
If you’re already a corporation but your company is not meticulous about holding board meetings and maintaining minutes, look into becoming a statutory close corporation. And even if you are meticulous, it’s just one more layer of protection for you.
Get Help Setting Up Your Business
The majority of companies are not set up in a way that’s optimal for the business owner, says Mount Pleasant business attorney Gem McDowell. If you want to discuss choice of entity for a new or existing business, call Gem and his associates at (843) 284-1021 today. They can help you evaluate your options and choose the entity that’s right for your business.
What’s the Difference Between a C-Corp and an S-Corp?
Deciding what kind of entity you want to be is one of the first steps when creating a new business. If you’ve already decided that your business should be a corporation, rather than a limited liability company or something else, you still have to decide whether you want to be a C corporation (C-Corp) or an S corporation (S-Corp).
The Differences Between a C-Corp and an S-Corp
A C-Corp is probably what you think of when you think of corporations; the big ones, like GM and ExxonMobil, are C-Corps. They can have an unlimited number of shareholders, and anyone may buy shares, including other companies and people in foreign countries.
An S-Corp, however, has limits on how many people may be shareholders (currently 100) and who may hold shares, since corporations, partnerships and non-resident aliens may not be shareholders. (There are other differences between the two, and you can read more on the IRS website about C corporations and S corporations.)
The main difference is in taxation. A C-Corp is taxed at the corporate level and if dividends are distributed to shareholders, those shareholders are taxed on those distributions. S-Corps seek to avoid this “double taxation” by being taxed differently. Instead, the S-Corp’s income “passes through” to the shareholders, who pay taxes on the income only once. (Same for losses.)
How to Become an S-Corp
First you need to incorporate in your state as a corporation, which by default is a C-Corp. You don’t need to file anything with the IRS or the federal government to become a corporation. But you do need to file a Form 2553 with the IRS if you want to change your status to an S-Corp. What you’re really doing is asking the IRS to tax you under a different section of the code. (The C in C-Corp is because those corporations are taxed under Chapter 1, subsection C of the IRS code; S-Corps are taxed under Chapter 1, subsection S.)
Pros and Cons of Becoming an S-Corp
Assuming that you’re deciding between being a C-Corp and an S-Corp (and not an LLC or other business entity), the two main things to consider are taxation and shareholders. Electing S-Corp status will let you avoid corporate-level taxes but may also restrict the growth of your company by putting limits on who and how many may become shareholders. You will also have to be sure to follow the IRS’s guidelines so that you don’t do anything to lose your S-Corp status.
There’s no one-size-fits-all answer to this question, so it’s a good idea to speak with the other shareholders, a business attorney and an accountant to decide if becoming an S-Corp is the best option for your company.
Learn More About Becoming an S-Corp
Call 843-284-1021 to speak with business attorney Gem McDowell and his associatess at Gem McDowell Law Group in Charleston. They can advise you on the pros and cons of becoming an S-Corp and provide legal advice on a variety of other issues in business law.
How A Buy-Sell Agreement Is Like Monopoly
Imagine sitting down with someone to play Monopoly, and it’s the first time ever for both of you. What do you do first? After you each pick a token – the top hat, the Scottie dog – you read out the rules so you both know how the game works.
Pass Go, collect $200. Not $600. Not $800. Land on Free Parking, you get the money in the middle of the board. You don’t just take the money when you feel like it. The game works best when every player is aware of the rules and follows them.
Business is the same way.
When you start a business with other people, you all have to agree on “the rules of the game,” the way things will work in your business. Drafting corporate governance documents is the best way to do this. One of the most important documents is the buy-sell agreement.
The Buy-Sell Agreement Sets the Rules of Business in Advance
A buy-sell agreement is like a pre-nuptial agreement for the business. Instead of saying what will happen when you divorce, it says what will happen when a particular event arises, like a partner being convicted of fraud or becoming disabled.
With a solid buy-sell agreement in place, owners run the company knowing that whatever arises, there is a pre-determined course of action that will take place. It can prevent partners from panicking and having to figure out what to do on the fly or, in some cases, suing each other.
Every business with more than one owner should have a buy-sell agreement in place.
The 8 Parts of a Buy-Sell Agreement
When you prepare a buy-sell agreement for your business at Gem McDowell Law Group, you and your partners will be taken through eight parts. Together with Gem, you’ll create a document that is tailored to your business and meets your needs. That is to say, this is not a cookie cutter document. It’s created for your business alone.
Each one of the eight parts asks you to consider a potential situation and how you’d like to deal with it, should it occur. They are:
1. Borrow money against shares. When an owner or shareholder borrows money against their shares, it can have an impact on the business. Many companies only a partner to borrow against their shares if 75% or 100% of the partners agree to it.
2. Voluntary transfer. What if one of the owners wants to give some shares to his wife? Well, you agreed to be in business with him, not his wife. The buy-sell agreement can prevent that transfer from taking place. Partners can agree upon who can and cannot be given shares in the business through voluntary transfer.
3. Involuntary transfer. This could happen when a bank forecloses on a shareholder’s shares of stock, for example.
4. Discontented owner. Let’s say that in a company with 8 owners, 7 think that the 8th is untrustworthy and want her out. Your buy-sell agreement can make a provision where if a quorum wants that partner gone, she can be forcibly bought out.
5. Crimes of moral turpitude. This legal term refers to a variety of crimes contrary to community standards of justice, honesty or good morals. If an owner of the business is convicted of such a crime, it could be very bad for the company as a whole. For that reason, the remaining owners may decide that a partner guilty of such a crime can be forcibly bought out.
6. Buyout because of retirement. AKA, one of the partners is not working hard enough. The agreement can include a stipulation about how many hours each owner must work in order to be in good standing, and if they don’t work that many hours, what the consequences are. Each owner may have a different number of hours, if, for example, one partner contributes money rather than manpower.
7. Disability. What happens to the business if one of the owners becomes disabled and can no longer work?
8. Death. A buy-sell agreement can include the terms of the buyout of the deceased partner’s share, such as whether the buyout is immediate or part immediate, part later.
Creating a buy-sell agreement early on in your business is smart because you and your partners are more likely to think about each situation in a clear and fair manner. After problems arise, it’s more difficult to get everyone on board – it’s like trying to create the rules of Monopoly after someone has landed on Free Parking. It’ll be a lot tougher getting the other players to agree that landing on Free Parking means you get the dough from the middle of the board. At that point, you’ll wish you had agreed on the rules at the start.
“Do I Really Need a Buy-Sell Agreement?”
The only way it’s remotely close to being okay to not having a buy-sell agreement is if you’re the only person in your business. If you’re in business with someone else, you need to have this and other corporate governance documents. Even if they’re not required by law, it’s just smart business to have them.
Learn More About Buy-Sell Agreements
Whether you’re in the early stages of creating a new business or you’ve been in business for years, call the Charleston office of business attorney Gem McDowell at 843-284-1021 to discuss how he and his associatess can help you. They work with companies to create tailored buy-sell agreements, capital call agreements, non-disclosure agreements, covenants not to compete and more.
5 Ways A Business Lawyer Helps Grow And Protect Your Business
Business law, or corporate law, is the application of law to the business world. The two are completely intertwined at all times. For that reason, as a business owner you should plan to work closely with a business attorney throughout the life of your company, right from the very start. Here are 5 common ways a business lawyer can help you and your business.
1. A business lawyer will help you create your business.
This is called “choice of entity” and it’s a crucial step every business owner must take. Should you be an LLC? A corporation? If so, what kind? Both provide shelter from creditors to your personal assets, but the two entities are very different from one another. Furthermore, there are four ways to structure limited liability companies in South Carolina, and numerous ways to structure corporations.
An experienced business attorney can advise you on which entity is right for you and can tell you the potential pitfalls that you won’t read about on LegalZoom or other DIY sites.
2. A business lawyer can draft your corporate governance documents.
Corporate governance documents describe, govern and constrain activity of the business owners. They “set the rules” and tell everyone involved how things should go and what should happen when a particular occasion arises. They are unique to each business.
You absolutely should have these documents if your company has two or more owners/shareholders/partners (these terms will be used interchangeably through the rest of this article, though they are technically different). Here are some you might consider having:
Bylaws detail how the business is structured and give information on the board of directors, the responsibilities of the owners and more.
An Operating Agreement details how much each member owns in the company, how profits and losses will be allocated, what each member’s responsibilities are, how the company should be managed and more.
A Buy-Sell Agreement is essentially a “pre-nup” for the company. This document lays out what will happen in the event that one of the owners or shareholders dies, becomes ill, simply stops working, etc.
A Capital Call Agreement spells out what happens when the company needs to raise money and what happens when one of the partners can’t come up with their part. A partner who can’t contribute equally may lose voting rights, give up shares, or forego distributions, for example.
Non disclosure agreements (NDAs) and covenants not to compete are intended to protect your company against a former owner or employee running off with your trade secrets and your best customers, thereby hurting your business.
Question: Can you DIY? Should you?
Google these documents and you’ll find plenty of examples and templates you can download and fill in yourself – but don’t do it! Those documents might have been created in a different state, or before a significant change in the law, and they may not be valid. They were certainly drafted for a different business, for different people with different needs from yours. No two businesses are alike, and no two sets of governance documents should be alike.
Question: When is the best time to get these documents?
The best time to draft these documents is at the birth of your new company, when it’s likely that you’ll come up with documents that are fair to all parties. Imagine three years down the road, when one of your partners can’t come up with the money for a capital call – do you think they will want to sign a capital call agreement penalizing non-payment with a high rate of interest? Probably not. To avoid situations like that, it’s best to do it as early as possible, when all the owners feel goodwill towards each other. However, if you’re years into your business and still don’t have them, get something drafted now. Every single company faces issues that these documents address, so it’s not a matter of if but of when something will happen.
3. A business lawyer advises you on the best course of action and helps protect you from potential problems.
A lawyer is often referred to as “attorney and counselor-at-law.” A lawyer both applies the law and provides counsel on it. During a company’s growth, a business lawyer will be most helpful providing counsel on various issues that pertain to the law in order to deal with problems as they arise or, better yet, prevent them in the first place.
Contracts are the area in which you’ll probably need the most regular help from an attorney. As a business owner, you should have a lawyer familiar with your business draft your contracts and look over contracts given to you before signing. Other issues attorneys can help with may include long-range planning (see #4 on succession planning below), drafting terms & conditions for a website, advising on letters received, and, in the case of an attorney experienced in real estate law like Gem McDowell, rezoning or buying and selling land, to name just a few.
4. A business lawyer helps you with succession planning.
Succession planning allows all partners to come to an agreement about what will happen when one of the partners retires and leaves the company. Succession planning usually happens when one partner starts thinking about retirement.
5. A business lawyer represents you in litigation.
Working with a lawyer in the four situations above should hopefully reduce the likelihood that you’ll ever be involved in a lawsuit – and that’s really the point. Litigation is costly, lengthy and stressful for all parties. By being proactive and working with a business attorney from Day 1, you can sidestep the landmines that could otherwise destroy your business.
Learn more about how a business lawyer can help your business
Contact South Carolina attorney Gem McDowell and his associatess at their Charleston office at 843-284-1021 to discuss your company and its legal needs. Whether you’re thinking of starting a new entity or you’ve been running a thriving business for decades, it’s never too late to get legal advice from lawyers with experience in corporate law.
The Unintended Consequences of Bad Estate Planning
We always advise people to get estate planning done. If you don’t decide what will happen to your assets upon your death, the state will decide for you.
But sometimes, despite best intentions, an estate plan turns out to cause unforeseen problems. That can happen with bad planning, which is sometimes worse than no planning at all. To illustrate this point, let me tell you a story.
What John & Nancy Planned For
Imagine a man named John in the following situation. John’s wife of 50 years, Nancy, recently died. John and Nancy thought they were being smart when they got estate planning done many years ago – and they were. But it turned out to be bad planning, because it didn’t take into account the fact that laws, people, and family dynamics change over time.
When Nancy and John sat down and talked about what they wanted to happen to her estate when she died, they agreed that she would split the estate up: part of her assets would go to their children, and part would go to her husband.
First you need to know that the government allows an unlimited amount of assets to be left to a spouse tax-free upon death. But the government doesn’t allow you to leave an unlimited amount tax-free to heirs or anybody else. The amount it allows you to leave tax-free is called the “applicable exclusion amount” (formerly called the “unified credit”).
So together Nancy and John decided that they would create a trust, and into that trust would go the full amount of money up to the amount of the applicable exclusion amount, so that her children could get that money and not have to pay taxes on it. The key is that here, she didn’t specify the exact dollar amount to go into the trust, she only said that the trust was to be filled to the point of whatever the current exclusion amount was. Her husband was named as trustee to control the trust during his lifetime, and the full value of the trust would go to the children upon his death.
What was left over from her estate after the trust was “filled up” would go to John. No matter what amount that was, it would be tax-free, because they were married.
So far so good. This kind of estate planning is pretty common, and it’s a smart way to maximize the amount of money you pass on to future generations while reducing the amount of taxes paid to the government. It works out well – but not all time.
When John and Nancy made this plan, it seemed great. The applicable exclusion amount at that time was $600,000, which was the limit for many years. Her estate was worth a total of $2 million, so during the planning phase, they expected that upon her death, $600,000 would go into the trust for the children, of which John would be the trustee. The other $1.4 million would go straight to John, including her half of the house they owned together.
Had she died soon after completing the plan, it would have worked out just the way they intended. But that didn’t happen.
What John & Nancy Got Instead
By the time Nancy died in early 2015, the applicable exclusion amount was not $600,000, but $5.43 million – a much larger amount. The full value of her estate went into the trust for the children, and her husband got nothing free and clear. Not even the house.
This was not what Nancy intended. Because of bad planning, everyone is in a difficult situation. Not only are they dealing with the grief of having lost their mother and wife, the family members now have to deal with the consequences of the faulty estate planning.
As the trustee of a trust that will go to the kids upon his death, the wishes of the father are now at direct odds with the wishes of the children. John, who had no substantial assets of his own and was counting on having some of his wife’s estate when she died (which is exactly what they thought was going to happen), wants money from the trust to live on. The kids want the trust to stay as it is, so they get the full value amount upon John’s death.
John has some limited access to the assets of the trust during his lifetime. That is, he can get his hands on some of the money, but not all of it. He’s entitled to the income from that trust during his lifetime; plus a total of 5% of the value of the trust, or $5,000, whichever is greater; plus expenses related to his health, education, maintenance and support (sometimes abbreviated “HEMS”). He would ask the trustee – in this case, himself – for the money to spend on those things. If they were considered legitimate expenses, he could spend it.
But here’s the rub: whether something counts as a legitimate or not varies from person to person. The IRS determines this, and they base that on someone’s standard of living. Donald Trump’s expenses considered “legitimate” would be substantially different from those of someone who makes $30,000 per year and lives very modestly. And if the trustee (John) disagrees with the future beneficiaries (the kids) over what’s legitimate, then they have to go to court.
So if, for example, John says he needs to use money from the trust to go to France for a year because that’s necessary for his maintenance, and the children disagree, they have to sue him.
And if the father wants to sell the house to move somewhere else, he can’t do it easily because it’s not his free and clear – half of the house is in the trust. If he goes ahead and sells the house anyway, it’s likely that his children will sue him.
As you can see, the situation is very complicated and it’s begging for lawsuits.
You don’t want to be in this situation. But how can you avoid it?
Avoid This Situation With Good Estate Planning
Remember that estate planning should be based on you, your unique situation and your family. It should not be based on whatever pre-made forms an attorney has ready. It must be about you.
1. Know that you have options.
Nancy and John could have decided to do something else instead. For example, Nancy could have left everything to John, and he could have used a “disclaimer” to disclaim anything he didn’t want, and that would go into the trust for the children. That’s just one option, but there are others. The point is, you don’t have to go with the first estate planning option presented to you if it’s not what’s best for you and your family.
2. Ask a lot of questions.
You should ask yourself what you want to happen with your estate when you die, and you may include your family in those discussions if you wish. You should ask questions before choosing an attorney to help you draw up these documents. Has he done these kinds of things before? What examples can she give you of the most complicated estate planning she has done?
Ask “what if” questions about the plans you’ve created.
• What if by the time I die, the applicable exclusion amount is $20 million? What if it’s $0? What will happen to my estate and my family then?
• What if my spouse remarries after my death? Will any of my money go to the new spouse’s children?
• What if one of my children does something I disapprove of after I die, do they still inherit a portion of my estate? Can I include something in my will to prevent that from happening?
An attorney experienced in complex estate planning will be able to answer these questions clearly and will be able to pose additional questions you hadn’t thought of.
3. Review your plan periodically with an attorney.
As you’ve seen, family dynamics can be complicated, especially when children from different marriages are in the picture, and things change. The amount excluded from estate tax is not set in stone, but is determined by Congress and therefore can change in any given year. That alone could have a huge impact on how your current estate plan will play out in the real world.
Again, ask questions.
• With the way things are now, will my original intention be honored?
• Has anything significant happened in my situation (births, deaths, estrangements with family members) to affect my original intentions?
• What changes must I make to ensure that my estate is distributed the way I want?
Learn More About Personalized Estate Planning
So what about your estate plan? Is it customized to you? Would it honor your intentions? If the answer is no, or you’re not sure, contact South Carolina attorney Gem McDowell and his associatess at 843-284-1021 to discuss your own estate planning needs.
What to Know About Estate Taxes for Estate Planning
An estate tax is levied on an estate of a certain value. Because the tax rate is so high – up to 40% – it’s smart to do what you can through estate planning to reduce or eliminate the likelihood that your estate will be taxed at your death.
If someone dies in the year 2015 and their estate is worth less than $5.34 million, it will not be subject to estate taxes. If they die and their estate is worth $5.34 or more, it may or may not be subject to estate tax.
Here are some other things to know about estate tax.
Spouses and estate tax
Estate tax usually doesn’t apply if you are passing on your estate to your spouse. This is “usually” because in some cases, if your spouse is not a U.S. citizen, different rules apply. If your spouse is not a U.S. citizen, you will want to speak to an experienced estate planning attorney like Gem McDowell.
You and your spouse can combine your separate amounts together so you can freely pass $10.68 million to your heirs. And spouses can “share” the amount so as long as the couple’s combined assets are $10.68 million or less, they will not be subject to estate tax.
Remember that this amount can change so always check for the most current value when making your estate planning documents.
An experienced tax and estate planning attorney in Mt. Pleasant
This is a very simplified overview of estate taxes. To discuss your own estate, and how to best handle it to reduce or avoid taxes, contact Gem McDowell at his Mount Pleasant, SC office at (843) 284-1021. Gem is an estate planning attorney with experience in tax law, and he can work with you to develop an estate plan to meet your goals. Call today.
What Happens if You Die in South Carolina Without a Will?
Updated February 2024
Less than half of US adults have a will, according to a 2021 Gallup poll – are you one of them? If so, you have committed Family Malpractice™, and you should know what happens to your estate if you die without a will in South Carolina.
If you die intestate – without a will – your estate will be disbursed according to South Carolina Code Title 62 Article 2. In order, your estate goes:
- Entirely to your spouse, if no surviving issue (descendants)
- 50% to your spouse and 50% divided among surviving issue
- Divided among surviving issue, if no surviving spouse
- Entirely to parents, if no surviving spouse or issue
- Divided among issue of the parents (your siblings), if no surviving spouse, issue, or parents
- If none of the above, then divided among grandparents or their issue
- If none of the above, then divided among great-grandparents or their issue
- If there is no taker, the estate passes to the State of South Carolina
Let’s say you’re married and have children. You die intestate. Your surviving spouse gets 50% of your estate, and your children split the remaining 50% equally.
On the surface, this sounds fair, and you might think it’s a good idea. But by allowing the state to decide what happens to your assets, you could be creating problems for your family later. This is especially true in so-called “Brady Bunch marriages,” or blended families, when heirs often clash.
When the spouse and the children don’t agree
Consider this scenario:
A husband and wife have been happily married for several years; it’s a second marriage for both. They both own the house they live in together, which is worth $200,000. When the wife dies, half of her half of the house (that is, 25%) goes to her husband. He now owns 75% of the house. The other half of her half of the house (the other 25%) is split among her three children from her first marriage. Collectively, they own 25% of the house.
The husband can’t afford to make the mortgage payments on the house now that his wife is gone; he has no choice but to sell. If he gets an offer for $200,000 and he receives 75% of that, he can pay off the mortgage. But the children tell him they want $100,000 of the $200,000, or they won’t sign the deed.
What can he do? Without their cooperation, he can’t sell the house. If he doesn’t sell, it will go into foreclosure. If he sues the children to force them to sell, by the time the matter is dealt with in the courts, he will have lost the house to foreclosure anyway.
So he sells the house and takes the loss.
The situation above could have been avoided if his wife had left behind a will.
Make your estate plan today
In the example above, the children didn’t get along with their stepfather. But even relationships that have always been solid can go sour when there’s money at stake. And when you begin to add in multiple children from different marriages, it gets even more complicated.
Dying without a will may burden your family with the stress of having to deal with your estate without knowing what your wishes were, all while coping with a huge personal loss. Fortunately, creating an estate plan isn’t difficult. Call Gem McDowell at (843) 284-1021 to set up an appointment to discuss your estate plan today.
The 5 Essential Estate Planning Documents
When you come to Gem McDowell Law Group to work on your estate plan, we discuss five documents together: a will, a trust, a living will, a healthcare power of attorney, and a durable financial power of attorney. You may not need them all, but we can figure that out together.
Here’s some information on what each document is, what it can and can’t do, and some things you should consider as you go through the estate planning process.
The Will
A will is a document you create to decide what will happen to your estate when you die. In the state of South Carolina, it must be signed in the presence of a witness and a notary to make it legally binding.
There are a few types of wills, but for people with a relatively small estate, a simple will is a good choice. When we draw up a simple will, we tailor it to each client, but we typically include the following sections in every will:
First, the will states that your mortgage, outstanding bills, and funeral costs are to be paid from your estate. Next, all taxes are to be paid. Unless your estate is worth over $5.34 million (as of 2015), and you want to pass it on to someone other than your spouse, you will not need to pay estate tax.
Next, we’ll authorize you to draft a handwritten memorandum. A handwritten memorandum is a useful document because it allows you to supplement your will anytime afterwards with no notary, no witness, and no attorney’s fees. You can use it to leave certain assets – generally collectible assets, such as a stamp collection – to a particular person. You cannot use it to transfer real estate, cash, or stocks and bonds. Once the handwritten memorandum has been authorized in the will, you can create one later as your wishes change and your estate changes (within limits). Simply write your wish in your own handwriting (e.g., “I, John Doe, wish to leave my ancient coin collection to my son Timothy”), and sign and date it.
Then, we talk about what to do with those large assets like real estate, cash, and stocks and bonds. You may want to leave them to your spouse, if he or she survives you, or you may want to pass them on to your heirs, other relatives, friends, or charitable causes, to name a few possibilities. How you choose to distribute your assets is up to you.
Finally, you name the personal representative (aka “executor”) who will administer the will and carry out your wishes. If you have children who are not yet adults, you will name a guardian, the person who will take physical custody of them when you’re gone. And if you create a trust for some or all of your assets, you will need to appoint a trustee.
The Trust
As with wills, there is more than one kind of trust. A common type of trust used in estate planning is called a testamentary trust, and it becomes effective when the last will becomes effective – at death. It is a convenient way to keep assets in trust for a period of time after your death until they are ready to be distributed. Most often in estate planning, it’s used for leaving assets to children, especially if they are not yet adults. Depending on your situation, you may not need a trust at all.
One common way to handle an estate is to leave everything to your spouse. If your spouse has predeceased you, then everything instead goes to the children.
If you have children, you should consider not giving them their inheritance all at once, particularly if they are very young. At Gem McDowell Law Group, we typically suggest giving three “bites of the apple.” That is, they will receive their inheritance in three separate chunks, spaced several years apart. For example, if you are leaving $3 million to your only daughter, you may decide to have her receive $1 million at age 25, $1 million at age 30, and $1 million at age 35. You may also choose to allow access to the trust money outside of the inheritance for four things: health, education, maintenance, and support.
Trusts are the legal documents that make this type of distribution possible.
The trust is overseen by a trustee, whom you name in your will. If your children are not yet adults you will also name a guardian in your will. The guardian (the person with custody of your children) should generally not be the same person as the trustee (the person with access to the money).
Depending on your unique situation, we can discuss other types of trusts you may want as part of your estate plan.
The Living Will
A living will, also called an advance health care directive, gives you the opportunity to make decisions now about your own health care in the future, should you lose the ability to make decisions for yourself. For example, you can decide now, while you’ve still got the power to make decisions, whether you’d want to continue life support if you were in a persistent vegetative state. In South Carolina, the living will also addresses nutrition and hydration.
Living wills become effective only in cases where one of two things is true:
- You are in a permanent state of unconsciousness and death would occur quickly if life support were removed; or
- You have a terminal illness.
From a legal point of view, neither of those situations is a legal standard – it’s a medical one. To make such a determination, South Carolina requires that the attending physician and another, independent physician both examine you and agree on the state of your health.
This matters because family members may argue over what you really intended.
Imagine a scenario where a woman has been in a car crash and is on life support. Her husband wants to take her off life support, which is what she wished for in her living will. The children don’t want to take her off life support, and threaten to sue if he does. Unless two doctors agree on her state and the living will becomes effective, the husband may not be able to carry out his wife’s wishes.
So while a living will is very important, it has some severe limitations. Because of these limitations, you may also want a healthcare power of attorney.
The Health Care Power of Attorney
A health care power of attorney, abbreviated HPOA or sometimes HCPA, can be considered a “backup” to a living will in a sense. If you don’t have a living will, or it can’t be applied (because one of two conditions above hasn’t been certified by two doctors), then your HPOA can be used instead. Both documents should agree with each other, so that one doesn’t say to end life support while the other says to continue, for instance.
While a living will lets you make the decisions for yourself, an HPOA lets someone else make the decisions for you. But as with a living will, you can make your wishes known. You can tell the agent you appoint that you want maximum treatment or not, that you want to donate your organs or not, or that you consent to tube feeding or not. If you feel better leaving those decisions up to your agent, you may also choose to give them the power to decide at the time of treatment.
The health care power of attorney was drafted by the South Carolina Legislature. It is presented in a Q & A format and asks you to consider different scenarios and to make a decision about what you want to happen. At our law office we have you initial each choice so it’s clear that you chose every selection yourself.
The Durable Financial Power of Attorney
With a health care power of attorney, you appoint an agent and give them the power to make healthcare decisions for you according to your wishes. With a durable financial power of attorney, you appoint an agent and give them the power to make financial decisions for you according to your wishes. Depending on your situation, you may or may not want a durable financial POA.
The Peace of Mind
Estate planning documents are some of the most important documents you’ll ever sign. This is not the time to use a one-size-fits-all form. Call Gem McDowell Law Group at (843) 284-1021 to speak with Gem about your estate planning needs. Once you have a solid estate plan in place, you’ll have peace of mind, knowing that your wishes and your family are taken care of.
Should I Use LegalZoom to Create My Will?
Should you trust your estate planning documents to DIY legal sites like LegalZoom?
Short answer: Probably not.
Every person is different. Every family situation is different. And if you have children, you know that every child is different, too. DIY legal sites don’t understand your unique situation. They can’t provide you with personalized counsel based on years of experience working with individuals and families.
Having access to legal information is a wonderful thing, but it’s incorrect to assume that a one-size-fits-all form will adequately address your own wishes and family dynamics.
When can you trust your estate planning to DIY legal sites like LegalZoom?
If you are unmarried, have a small estate with very few or no assets, and have no children, a boilerplate will may be all you need. In that case, go ahead use the service if you feel like it’s a good fit for you.
But when your situation changes, it’s smart to talk to an experienced attorney who can help you achieve your goals, rather than fit you into pre-written forms.
Personalized Estate Planning in the Charleston Area
When that happens, call Gem McDowell Law Group in Mount Pleasant, SC at (843) 284-1021. Gem can walk you through the process of creating a personalized, comprehensive estate plan. Call today to schedule a free consultation.
