Should Your Estate Go Through Probate? Why or Why Not?
Last time we cleared up confusion around probate in South Carolina and looked at what probate is and isn’t.
If there’s one thing people do know about probate, it’s that they want to avoid it when the time comes. But is that really the best advice for everyone? Let’s look at the common reasons why people work to avoid probate, and why it may not be worth the effort to avoid probate after all.
Avoiding The Cost Of Probate
By avoiding probate, you avoid the associated costs. In South Carolina, the cost of probate as of 2017 is:
$1,845 for the first $1,000,000
$2,500 for every $1,000,000 thereafter
For an estate worth $2 million, for example, the total cost of probate would be $4,345, while an estate worth $10 million would have a fee of $24,345. Many people choose to avoid probate to skip paying these fees.
What to consider: Keep in mind that it can be costly to set up an estate plan that keeps assets out of probate in the first place. For smaller estates, it may not be worth it.
Maintaining Privacy
When a will is filed with the probate court, it becomes a public document. In contrast, the details of an estate handled through a trust do not become public.
What to consider: Most people do not need to worry about this. Public figures facing curiosity and business owners wanting to keep company financial info private may have a valid reason for concern, but for most people this is a non-issue.
Making Disbursements To The Heirs More Quickly
Making sure heirs get their inheritances more quickly is another reason people choose to avoid probate. Theoretically, the trustee of a living trust can begin disbursements to heirs immediately upon death. In practice, trustees will ensure that the estate’s debts and taxes are paid before disbursing money to heirs. Whether this actually means beneficiaries get their money more quickly depends on the situation.
What to consider: Estates passing outside probate are subject to creditors’ claims for three years compared to just eight months given to creditors through the probate process. This increases the chance that a creditor will make a claim after disbursements have been paid out from the trust, which can lead to lawsuits against the trustee and/or beneficiaries. The shortened time creditors have to make a claim is an advantage of going through probate.
Is Your Estate Set Up To Pass Through Probate or Avoid Probate?
Estate planning is complex. Laws change and family situations change, making old estate plans obsolete or imprudent. It’s difficult to know the long-reaching consequences of estate planning unless you speak with an experienced estate planning attorney like Gem McDowell of Gem McDowell Law Group. He don’t just provide wills and trusts, but the insight and advice from years of experience on the real-world consequences of estate plans. Call Gem today at their Mount Pleasant office at (843) 284-1021 or use this contact form to set up a consultation.
Clearing Up Confusion About Probate in South Carolina
Updated 11/27/2022
For some people, “probate” is a dirty word. Much of this attitude comes from not understanding the process, so let’s clear up the confusion.
What Probate Is and What Probate Isn’t
There are some myths out there about probate, so here’s what it’s not: Probate is not a way for the government to take the estate of someone who dies without a will. Probate is not a way to avoid any applicable estate taxes. Probate does not take many years (except in rare cases).
Probate is simply a process, overseen by the court, in which a person’s estate is settled. It’s a way for ownership of assets to be transferred from the decedent to other people and for final taxes and debts to be paid.
For an estate to go through probate, no estate planning is required. A person’s estate can pass through probate whether they died without a will or with one, as long as it has assets that are subject to the process.
For an estate to avoid probate, the deceased must own no assets subject to probate at the time of death. A common way to do this is to put all those assets in a living trust (an inter vivos trust), which stays in someone’s name and control during their lifetime and immediately passes to the named successor trustee upon death. The assets owned by the trust are not subject to probate.
What’s subject to probate and what’s not?
Assets subject to probate in SC include:
- Real estate held as a tenant in common
- Property owned solely in the deceased’s name
- Interest in a partnership, corporation, or LLC
Assets not subject to probate in SC include:
- Real estate held as a joint tenancy with right of surviorship
- Retirement accounts with named beneficiary
- Insurance accounts with named beneficiary
- Pension plan distributions
- Assets held in a trust
- Assets that are payable-on-death or transfer-on-death
Now that we know what probate is and isn’t, let’s look at the process.
The Probate Process in South Carolina
The probate process consists of a series of steps:
1. Deliver the will at death. Someone in possession of the deceased’s will must deliver it within 30 days to the judge of the probate court, or to the personal representative named in the will, who will then deliver it to the judge.
2. Personal representative is appointed. This person is typically named in the will and is officially appointed by the court.
3. Notice to intestate heirs is sent. Heirs can contest if they aren’t named or are treated differently.
4. Inventory and appraisement of the estate. This must be filed within 90 days of the opening of the estate. Professional appraisers may be needed to provide the values at the date of death for assets like homes, art, and jewelry.
5. Final accounting. This involves paying applicable taxes, outstanding debts, and ongoing expenses while settling the estate, such as legal and accounting fees. If there’s not enough money in the estate to pay all debts owed, creditors will be paid in order of priority according to South Carolina code (as described in Section 62-3-805).
6. Disbursements. If there’s money left over after debts and taxes are paid, distributions may finally be made to the heirs according to the will, or, if there is no will, according to the state.
7. Close the estate. The personal representative files a number of documents with the court after the above steps have been completed, and the estate is finally closed when the court issues a Certificate of Discharge.
Probate Fees in South Carolina
An estate going through probate is subject to probate fees as laid out in South Carolina Code Section 8-21-770. Fees are based on the gross value of the decedent’s probate estate and are set/calculated as follows:
| Gross Value of Probate Estate | Fees |
| Less than $5,000 | $25.00 |
| $5,000-$20,000 | $45.00 |
| $20,000.00-$60,000 | $67.50 |
| $60,000.00-$100,000.00 | $95.00 |
| $100,000.00-$600,000.00 | $95.00 plus 0.15% of the property valuation between $100,000 and $600,000 |
| $600,000 or higher | $95.00 plus 0.15% of the property valuation between $100,000 and $600,000 plus ¼ of 1% (0.25%) of property valuation above $600,000
= $845 plus ¼ of 1% (0.25%) of property valuation above $600,000 |
Here’s a table with sample probate fees calculated based on the value of the estate:
| Gross Value of Probate Estate | Fees |
| $150,000 | $170.00
$95.00+(0.0015*($150,000-$100,000)) = $95.00+$75.00 = $170.00 |
| $300,000 | $395.00
$95.00+(0.0015*($300,000-$100,000)) = $95.00+$300.00 = $395.00 |
| $500,000 | $695.00
$95.00+(0.0015*($500,000-$100,000)) = $95.00+$600.00 = $695.00 |
| $750,000 | $1,220.00
$845+(0.0025*($750,000-$600,000)) = $845+$375 = $1,220 |
| $1,000,000.00 | $1,845.00
$845+(0.0025*($1,000,000-$600,000)) = $845+$1,000 = $1,845 |
| $3,000,000 | $6,845.00
$845+(0.0025*($3,000,000-$600,000)) = $845+$6,000 = $6,845 |
| $10,000,000 | $24,345.00
$845+(0.0025*($10,000,000-$600,000)) = $845+$23,500 = $24,345 |
How Long Does Probate Take in South Carolina?
How long it takes an estate to go through the probate process depends on a number of things, including:
- Whether the deceased had a valid will or not
- How large and complex the estate is
- Whether the will is contested
- Whether lawsuits are filed
- How efficient the personal representative is
Under good conditions, a relatively simple estate can take approximately a year from open to close. More complex cases will take longer.
(Note that “small estates,” which contain no real property and total less than $25,000 in value, may qualify for a summary administrative procedure, a quicker and cheaper process than the regular probate process. A small estate can be settled in a matter of a few days or weeks.)
Is It a Good Idea to Avoid Probate?
Now that you know more about probate in South Carolina, you may be wondering whether it’s smart to approach estate planning with the intent of avoiding probate altogether. There are many things to consider, so that’s the subject of the next blog.
For help with your estate plan, contact Gem McDowell Law Group in Mount Pleasant. Contact Gem today at (843) 284-1021 to set up a consultation.
The Statute of Elizabeth: What You Need to Know About Transferring Assets
What if you owed someone a lot of money, but you didn’t want to pay them back? You might try to put your assets somewhere they couldn’t be touched; for example, you might gift them to a person you trust, or transfer them to an LLC.
Fortunately for your creditor, and unfortunately for you, you won’t get away with this scheme if your intention is to avoid paying your debts.
Moving assets in the way described above is referred to as “fraudulent conveyance,” after the Fraudulent Conveyances Act of 1571, aka the Statute of 13 Elizabeth.
The Statute of Elizabeth
The Fraudulent Conveyances Act, as it’s properly known, was an English act of 16th Century Parliament that many U.S. states adopted early on. Most states have since adopted the Uniform Fraudulent Conveyances Act (UFCA) or, more commonly, the Uniform Fraudulent Transfer Act (UFTA).
The purpose of the Statute of Elizabeth is to provide a way for creditors to “undo” asset transfers of their debtors when the transfers were done so fraudulently. According to South Carolina Code, “every gift, grant alienation, bargain, transfer, and conveyance of lands… for any intent or purpose to delay, hinder, or defraud creditors and others of their just and lawful actions, suits, debts, accounts, damages, penalties, and forfeitures must be deemed and taken… to be clearly and utterly void…”
How does the court know whether the transfer was, indeed, done fraudulently? If the transferor denies fraud (as you’d expect), the court can look for these “badges of fraud”:
- Insolvency or indebtedness of transferor
- A lack of consideration for the conveyance
- A relationship between the transferor and transferee
- Pending litigation or threat of litigation
- Secrecy or concealment
- Departure from usual method of business
- Transfer of debtor’s entire estate
- Reservation of benefit to the transferor
- Retention by the debtor of possession of the property
The court will look for a number of badges of fraud; one alone does not create a presumption of fraud.
If the court does find that the conveyance was fraudulent, it can be “undone,” giving the creditor recourse for collecting on its debt.
A recent South Carolina case on the Statute of Elizabeth
The South Carolina Court of Appeals heard a case on this very subject and decided in the case in February. Here’s what happened.
Kenneth Clifton borrowed $3.873 million from First Citizens Bank
Kenneth Clifton was a successful real estate developer who frequently bought land as investment properties and transferred them to LLCs. He purchased one property with Linda Whiteman in 1995, a piece of land in Laurens County, SC of approximately 370 acres, which they said was for retirement.
Clifton also regularly borrowed money to finance his purchases. He took out three loans from First Citizens Bank to finance three separate investments, totaling an initial loan amount of $3.873 million, and renewed them several times.
Around the time that the housing bubble burst, Clifton requested extensions on the loans, which the bank granted after he provided a personal financial statement demonstrating his ability to pay them back. His personal financial statement put the value of the assets he held at around $50 million, including a 50% stake in the Laurens County property valued at $1.57 million.
Clifton transferred away his interest as the bank came for its money
Before receiving an extension on the third loan, Clifton didn’t tell the bank that both he and Whiteman transferred their interests in the Laurens County property to Park at Durbin Creek (PDC), an LLC that Clifton had an interest in.
When the bank asked Clifton to come current with interest payments and provide more collateral before extending the loans again, he didn’t, and the bank began foreclosing proceedings, getting a deficiency judgment of $745,317.86 plus interest.
Meanwhile, Clifton disassociated himself from PDC and transferred his membership in it to Streamline, a company that did not yet exist and was comprised of his two daughters and ex-wife.
When the bank tried to collect on the judgment, it couldn’t, as all the assets listed in Clifton’s personal financial statement had been foreclosed on, transferred away to cover other debts, or otherwise disposed of. The bank filed suit against Clifton, citing the Statute of Elizabeth.
Fraudulent or not?
After a one-day, nonjury trial, the Circuit Court issued an order to set aside the conveyance of the Laurens County property to PDC; the conveyance of his 50% interest in the property was null and void, pursuant to Statute of Elizabeth. (The Court found many other issues with the transfer of interests to Streamline, as well.)
Clifton denied having transferred the land fraudulently, but the Court found that sufficient badges of fraud existed – six out of the nine listed above, to be exact.
The Court of Appeals affirmed the Circuit Court’s findings.
Asset protection the right way
Let’s look again at the badges of fraud:
- *Insolvency or indebtedness of transferor
- A lack of consideration for the conveyance
- A relationship between the transferor and transferee
- *Pending litigation or threat of litigation
- Secrecy or concealment
- Departure from usual method of business
- Transfer of debtor’s entire estate
- Reservation of benefit to the transferor
- Retention by the debtor of possession of the property
The two marked with an * are key. If someone knows they owe money they must pay back soon but can’t, or even if they don’t owe any money but could reasonably expect a lawsuit coming their way, then transferring away assets can look suspicious.
However, asset protection is important, and there are ways to do it correctly. This is when it’s vital to talk to an attorney with experience in estate planning. Gem McDowell of the Law Offices of Gem McDowell is a corporate, tax, and estate planning lawyer with 25 years of experience helping people grow and protect their assets. Call him at their Mount Pleasant office at (843) 284-1021 or by filling out this contact form online.
Law Is Not A DIY Field: When Not To Represent Yourself
Individuals have the right to represent themselves and “act as their own attorney,” but do businesses? Not necessarily. Try to DIY, and you may discover you’ve overstepped the bounds.
That’s what happened to Community Management Group, LLC, which manages HOAs and condo associations in the Charleston tri-county area, in a recent case. Beyond the typical duties of property management companies, such as property upkeep and enforcement of association rules, CMG also engaged in the practice of law without the help of an attorney. Specifically, CMG “prepared and recorded a notice of lien and related documents; brought an action in magistrate’s court to collect the debt; and after obtaining a judgment in magistrate’s court, filed the judgment in circuit court,” and advertised the fact that they did these things, according to the South Carolina Supreme Court decision.
The Supreme Court in South Carolina has the power to regulate the practice of law, and has made some allowances for non-lawyers to act in place of a lawyer in certain instances. In its decision, the Court clarifies instances where it’s not appropriate for non-lawyers to practice, including the things that CMG did.
Hire an attorney to look out for your interests instead
There’s a reason the South Carolina Bar gives out licenses to practice law. Despite the proliferation of information available on legal issues on the web, it doesn’t mean it’s a good idea – or even legal – to take legal matters into your own hands. Instead, work with an experienced attorney who can help with your business and estate planning needs, like Gem McDowell of Gem McDowell Law Group in Mt. Pleasant, SC. Gem has 25 years of experience in business law, tax law, commercial real estate, and estate planning. You can reach him by calling (843) 284-1021 or by filling out this contact form online.
When Covenants Not to Compete and NDAs Reach Too Far
South Carolina courts are clear in their general dislike of covenants not to compete and any provisions that restrict an individual’s ability to work. They are also clear in their tendency to rule in favor of the employee rather than the employer in related cases. This was the issue at hand in a recent case decided by the South Carolina Court of Appeals.
Covenants not to compete and non-disclosure agreements (NDA) were covered on this blog previously, because it’s so important for employers to be extremely careful in their wording on non-compete and non-disclosure agreements. If they try to restrict their employees’ actions too much, an employer may discover their agreement has reached too far and is invalid.
Fay vs. Total Quality Logistics
That’s essentially what happened in the case at hand, Fay vs. Total Quality Logistics. TQL, an Ohio-based transportation and logistics company, hired Joshua Fay in late 2012. As required by the company, Fay signed TQL’s Non-Compete, Confidentiality, and Non-Solicitation Agreement before commencing work. The Agreement was signed in Ohio and was to be enforced under Ohio law.
The following summer, Fay was fired. He then founded JF Progressions, LLC, in Mount Pleasant, SC, providing logistics services to another company. TQL found out and notified Fay that TQL intended to pursue legal action if he didn’t stop what he was doing. Fay then filed suit against TQL to seek a declaratory judgment that the Agreement he had signed was invalid and not enforceable. He argued that the Court must invalidate the Agreement if it is contrary to SC public policy, even if Ohio law applied to the interpretation of the Agreement.
The case made it to the South Carolina Court of Appeals which sided with Fay and found that, though it was to be enforced under Ohio law, the Agreement offended South Carolina public policy and was therefore not enforceable. The Court of Appeals found that the lower court (the Circuit Court) erred when it ruled against Fay, stating that the Agreement was enforceable under Ohio law and did not offend SC public policy.
When non-compete and non-disclosure agreements are too broad
To understand why the South Carolina Court of Appeals ruled as it did, it’s important to understand the basics of non-compete agreements. Two important clauses in a non-compete agreement are about time and geography; agreements place limits on the length of time and the geographical area in which an employee or former employee can work. An enforceable agreement strikes a balance between protecting the employer’s interests and giving the employee or former employee the freedom to earn a living in their profession.
South Carolina has determined that these limits must be “reasonable.” In the Agreement Fay signed, the limits were not reasonable under South Carolina’s standards. The non-disclosure agreement was worded so as to effectively be a non-compete agreement, which was to be in effect “at all times.” Under the Agreement, Fay was restricted from working with “Competing Businesses,” which was defined as “any person, firm, corporation, or entity that is engaged in the Business anywhere in the Continental United States.” If TQL’s Agreement were enforced, Fay would not be able to work in the field of transportation and logistics in the Continental U.S. “for an indefinite time, if not forever,” in the Court of Appeal’s wording. South Carolina determined that these restrictions were too broad and violated the state’s public policy, as they restrict an individual’s right to exercise their trade.
The Court of Appeal’s decision cited the Stonhard case, quoting “The agreement fails to limit the covenant to a particular geographical area. To add and enforce such a term requires this [c]ourt to bind these parties to a term that does not reflect the parties’ original intention. Therefore, we hold that the covenant, despite any reformation, is void and unenforceable as a matter of public policy.”</P
In addition, the Court of Appeal’s decisions reaffirmed the fact that South Carolina does not follow the “blue pencil” rule. In non-compete cases, this rule allows courts the discretion to invalidate certain portions of an agreement while maintaining others and to create terms the court believes the parties should have agreed on in the first place.
(It’s important to note that this discussion is about the March 2017 decision of the South Carolina Court of Appeals. It’s possible that the South Carolina Supreme Court may take up this issue at a future date, at which point this decision could be reversed or affirmed.)
Lesson for employers on covenants not to compete and NDAs
The lesson here for employers is to be extremely careful in the wording on covenants not to compete, NDAs, and other contracts that have any limiting effect on your employees’ current or future ability to work. As we can see from this case, strict wording of an NDA can effectively be interpreted as a non-compete agreement, even if that wasn’t the original intention.
Employers also need to be cognizant of these issues with regards to different states’ laws. Even if your state’s courts find your contracts “reasonable,” another state’s courts may not, depending on the state’s public policy. The internet cannot provide reliable guidance on this topic, which is why it’s important to discuss it with an attorney who’s well versed in this topic.
For guidance on how to craft your company’s covenants not to compete and NDAs, or for advice on one you’ve already signed, contact Mt. Pleasant business attorney Gem McDowell. He can be reached at Gem McDowell Law Group in Mount Pleasant at (843) 284-1021 or by filling out this contact form online. Contact them today.
Coming Soon to a Town Near You
For many years, South Carolina has limited the number of liquor stores an owner may have within the state to three. However, that law is no longer enforceable thanks to a recent South Carolina Supreme Court decision.
Total Wine & More, a large wine and liquor retailer that’s likely familiar to residents of Charleston, Greenville, and Columbia, was denied a fourth liquor license to open a new store in Aiken. In response, it brought an action seeking a declaratory judgment that the limitations in the law were unconstitutional.
The trial court found the provisions constitutional because they presume laws are constitutional, but when the issue was appealed, the Supreme Court found the reverse.
Now that the law has been declared unconstitutional, expect to see some bigger name stores dominate the alcohol landscape across the state, perhaps starting with Total Wine in Aiken.
Business guidance from an experienced corporate attorney
For legal and strategic advice, contact Gem McDowell of Gem McDowell Law Group. Gem has 25 years of experience in business law, including business creation; contracts, NDAs, covenants not to compete, buy-sell agreements and more; handling large commercial real estate transactions; tax law; and estate planning. You can reach him at (843) 284-1021 or by filling out this contact form online.
Where Should I Open My Business In South Carolina?
Note: this blog was updated in October 2019 to reflect the most recent data available
In recent years, South Carolina has attracted numerous companies to the state that want to take advantage of various business incentives. Two such headline-making companies include Boeing, which opened its Charleston facility in 2011, and Volvo, which officially opened its Ridgeville plant in 2018.
Business owners looking to open a store, plant, office, or other business here first need to consider where they’re most likely to encounter success. While available facilities, infrastructure, and local incentives may play a factor, undoubtedly the largest factor that will affect success is population.
South Carolina is Growing in Population
Companies opening a new factory or branch look for available work force to hire from. To forecast their success, they need to look not only at current population but at population trends, too.
South Carolina has been growing in population for years and was #9 on the U.S. Census Bureau’s list of Top 10 States in Numeric Growth (with 62,908 people) and #9 on the Top 10 States in Percentage Growth (at 1.3%) for 2017-2018. It’s a safe bet that this trend will continue for many more years and that South Carolina will remain an attractive destination for businesses.
But where are all the newcomers moving to? Is the influx evenly distributed through the state? The Charleston tri-county area sees 28 people move into the area every day, and the Charleston metro area alone is growing at three times the U.S. average. Meanwhile, several cities and counties lose people every day to other areas of the state and the country.
What’s going on?
Map of South Carolina showing counties. Click to enlarge.
A Quick Lesson on South Carolina Demographics
At the end of the Civil War, South Carolina had 31 counties. By 1919, we had 46. Fifteen new counties were added in between, many to honor prominent men in South Carolina’s history.
For years, the state ran everything and counties had very limited power. Adding counties essentially meant drawing new lines on the map. New counties were carved out of existing counties: Marion became Marion and Dillon; Charleston became Charleston, Berkeley, and Dorchester; Barnwell became Barnwell, Allendale, and Bamberg; and so on. County populations were slashed as more counties were added, but again, that had no real practical consequences, as the state was mostly in charge.
When counties gained more power after the Home Rule Act was passed in 1975, however, the number of counties – and their smaller sizes – began to matter. Where the state had previously been in charge, suddenly counties were responsible. Many counties found themselves without the ability to raise adequate funds from their low populations to provide the police and emergency services, public schools, infrastructure, parks, libraries, and other services and amenities they were now responsible for. That issue persists for some counties to this day.
Which S.C. Counties Are Growing and Which Are Shrinking?
It appears to be a vicious cycle. As counties are able to provide less to their residents, residents leave for greener pastures, leaving the county with even fewer people to tax and even less money to provide for their remaining residents.
You can see this happening in census numbers. Between 2010 and 2018, 21 of South Carolina’s 46 counties have declined in population: Abbeville, Allendale, Bamberg, Barnwell, Calhoun, Chester, Chesterfield, Clarendon, Colleton, Darlington, Dillon, Fairfield, Hampton, Lee, Marion, Marlboro, McCormick, Orangeburg, Sumter, Union, and Williamsburg.
A further 11 grew more slowly than the U.S. growth rate of 6.0%: Aiken, Cherokee, Edgefield, Florence, Georgetown, Greenwood, Laurens, Newberry, Oconee, Pickens, and Saluda.
Three counties grew faster than the U.S. growth rate of 6.0% but slower than the South Carolina growth rate of 9.9%: Anderson, Kershaw, and Richland.
The remaining 11 counties grew faster than the South Carolina growth rate of 9.9%: Beaufort, Berkeley, Charleston, Dorchester, Greenville, Horry, Jasper, Lancaster, Lexington, Spartanburg, and York.
See the charts at the end of this post for all the numbers.
What This Means for Businesses Moving To South Carolina
Be strategic before selecting a place to open your business.
South Carolina as a whole is a great place to run a business, but some counties are more attractive than others due to available workforce and infrastructure. Counties with a growing population will be more likely to support your business for years to come.
In general, counties on the coast (with the exception of Georgetown) and in the northwest part of the state (which include fast-growing cities Spartanburg, Greenville, and Rock Hill) have been trending upwards in terms of population over the past decade.
Get strategic advice from Mt. Pleasant corporate attorney Gem McDowell
Population is just one factor when it comes to deciding where to open your business in South Carolina. To discuss legal aspects of your business, contact business attorney Gem McDowell of the Gem McDowell Law Group.
Business owners need more than corporate legal services to make their businesses thrive – they need strategic advice. Gem McDowell has over 20 years of experience helping businesses grow in South Carolina. He can advise on a number of topics including complex real estate transactions, where to open a new factory or office, what to do about corporate taxes, and much more.
Contact Gem and his associates at the Mount Pleasant office today by calling (843) 284-1021 or filling out this contact form online.
South Carolina counties that lost population 2010-2018. Click to enlarge.
South Carolina counties that grew at a rate of less than the U.S. growth rate of 6.0%. Click to enlarge.
South Carolina counties that grew faster than U.S. growth rate of 6.0% but slower than S.C. rate of 9.9%. Click to enlarge.
South Carolina counties that grew faster than the S.C. rate of 9.9%. Click to enlarge.
Are You Protected? What You May Not Know About “Piercing the Corporate Veil.”
One of the first things to do when going into business is to select the appropriate business structure for your venture and set it up correctly. A primary advantage of doing so is gaining the protection of the entity so that your personal finances are safe from being used to settle company debts or pay the company’s bills. Having the right business structure also allows for the business to be considered a separate entity, with its own income and debts separate from other businesses that you may also own.
But don’t assume that just because you’ve set up a legal structure that you and your business are fully protected; that protection is only valid if you follow all the rules. In other words, you are not guaranteed liability protection just because you have created a limited liability company or a corporation. (Note that sole proprietorships and partnerships do not offer the same liability protection and so are excluded from this discussion.)
Today we’ll look at the concept of “piercing the corporate veil” (PCV), which is when a court suspends the liability protection your business entity gives you, what it means, and how you can avoid it.
What Can Happen When You Fail to Keep Business and Personal Accounts Separate
One of most important ways to maintain your personal liability protection is to be scrupulous about keeping business and personal finances separate. Maintain separate checking and savings accounts and use different credit cards for your business and for yourself. The key idea is not to “commingle” your personal finances with your company’s finances. You pay your own bills from your personal account and you make sure to pay the company’s bills from the company’s account.
Let’s say you aren’t meticulous about keeping finances separate. Then your business hits a rough patch and is unable to pay a debt it owes. Since your finances aren’t separate, it may look like you and your business are essentially the same, and you personally may be on the hook. Your assets – including investments, cash, your car, and your house – could be taken to satisfy your company’s debt. That’s why it’s crucial to keep separate accounts.
What Can Happen When You Fail to Keep Individual Businesses Separate
PCV isn’t just an issue of separate business from personal accounts. It’s also a matter of keeping businesses distinct from each other.
Imagine a scenario like this. Alpha Corp. and Bravo Corp. are run by the same management group. About 60% of the shareholders are the same between the two, as well. Alpha Corp. runs into trouble and needs to pay a creditor immediately, but has no money. No problem, because Bravo Corp. has plenty of money. Bravo Corp. writes a check directly to pay Alpha Corp.’s debt.
The companies have now commingled funds. When this happens, they may be considered “alter egos” of one another under the alter ego doctrine, a.k.a. the instrumentality rule. Here are two examples of what can happen next:
- Three shareholders of Bravo Corp. who are not also shareholders of Alpha Corp. are, understandably, not happy that Bravo’s funds are being used to pay off Alpha’s debts. They bring a type of lawsuit called a derivative action against the management group arguing that there’s one giant pool of money, and the companies are in fact not separate.
- Another creditor sues Alpha Corp. for not paying its debt. During discovery, it’s determined that Alpha and Bravo have commingled funds. Now Bravo Corp. can be compelled to pay Alpha Corp.’s debts, as the two are alter egos.
It’s not just about money, either. Even seemingly simple things as sharing the same mailing address, office space, and letterhead may lead to trouble, as the “blurred identity theory” addresses situations where individual businesses don’t have individual identities. The two companies may be confused with each other as their identities are “blurred” into one another.
Proving PCV in Court
The concept of piercing the corporate veil (also known as “lifting the corporate veil”) was put to the test in the 1976 case that originated in South Carolina, DeWitt Truck Brokers v. W. Ray Flemming Fruit Co. The U.S. Court of Appeals for the Fourth Circuit upheld the District Court’s decision to pierce the corporate veil and impose individual liability on the owner. Flemming was found personally liable for debts owed by his company after it was discovered the business did not follow basic corporate protocols and that he, as the dominant shareholder, had drawn a salary, leaving the company undercapitalized and in debt.
In its decision, the court reiterated that while it recognizes a corporation is a separate entity that’s distinct from its owners and officers, it can “decline” to recognize that autonomy when doing so would “produce injustices or inequitable consequences.” Still, it will do so “reluctantly” and “cautiously.”
Bases for PCV noted in the DeWitt decision include:
- Fraud
- Inadequacy of capital
- Complete domination of the corporate entity
- Instrumentality theory (discussed above)
- Failure to observe corporate formalities
- Non-payment of dividends
- Insolvency of the debtor corporation at the time
- Siphoning of funds by the dominant shareholder
- Non-functioning of the other officers and directors
- Absence of corporate records
- Existence of the corporation as a façade for the operations of the dominant stockholder(s)
Ultimately, the court may pierce the corporate veil when “a number” of the above factors exist in order to right an injustice or unfairness.
How to Avoid PCV
You can make it less likely for a plaintiff/complainant to win (and less likely to sue in the first place) over this issue if you follow proper procedures.
- Keep finances separate between individual and company or company and company
- Move funds between entities through loans or other above-the-board methods
- Keep distinct business identities through separate addresses, trademarks, letterheads, etc. for each company
- *Hold regular shareholder meetings
- *Keep minutes
- *Pay dividends if applicable
*Applicable to corporations, not LLCs.
It’s not difficult to follow protocols to avoid PCV, it just takes discipline. When people get lazy and let basic things slip, that’s when problems arise.
Speak with a corporate attorney about your business
This is a very general overview of some elements of PCV; the topic is extensive and can become very complex. Maintaining the liability protection your business entity gives you is one of the most important things you can do. Make sure you’ve got your bases covered by speaking with a corporate attorney like Gem McDowell.
Gem handles a wide range of corporate law issues and advises on business matters. Contact Gem at their Mount Pleasant office today by calling (843) 284-1021 or filling out this contact form online. They are ready to help you with your business.
How Facebook Can Cost You Your Job (Or Even Your Freedom)
Be careful what you post on Facebook – it could get you suspended from your job. That’s what happened recently to a judge in South Carolina.
Judge Kenneth E. Johns, Jr., a probate court judge in Oconee County, posted a comment on Facebook about a well-publicized matter that was in probate court at the time. It was discovered that Johns had also posted political content, including an apparent endorsement for a particular political candidate, plus information about fundraising for a church.
Why does any of that matter? Because it violated multiple provisions of the Code of Judicial Conduct. As a result, he was suspended from the bench for six months by action of the Supreme Court of South Carolina, all because he was careless about what he posted on Facebook.
It’s Not Just Judges Who Get in Trouble
It’s unlikely that something you post on social media will end up being scrutinized by the Supreme Court. But you don’t have to be a judge to get in trouble.
Jurors have gotten in trouble for using social media during their trials. A woman in New York was held in contempt and fined $1,000 after Facebooking details of the case she was hearing. One Texas juror was charged with four counts of contempt of court and received 16 hours of community service for sending a Facebook friend request to the defendant in the case he was hearing. A Florida man also tried to friend the defendant in his case on Facebook, and was not only dismissed from the jury but also received three days in jail. These are just a few examples.
Outside of the law, anyone can be fired for their social media postings (and many, many have been) if it violates company policy, or sometimes just because the boss doesn’t like what they posted. There’s no clear protection under the law unless you’re posting about “concerted activities” like improving working conditions, and you’re involving other coworkers in the discussion, in which case it may be protected.
Employers Need to Watch Out, Too
If you’re an employer, that’s not the end of the story, though – firing someone may not be as easy as you thought, as some ex-employees are fighting back. For instance, earlier this year a Pennsylvania judge ordered Chipotle to rehire a man they’d fired over a tweet, and to pay him lost wages, too.
For advice on firing, hiring, and other matters of business law, contact corporate attorney Gem McDowell at his Mount Pleasant office. He serve clients in the greater Charleston area and across South Carolina. To schedule your free initial consultation, call (843) 284-1021 or fill out this contact form online today.
Ever Wondered Why That Storm Drain is in Your Yard?
Have you ever wondered why that storm drain or telephone pole is in your backyard, or why the telephone company can come dig up your yard and you can’t do anything to stop them?
The answer: Easements. An easement is a right someone has over land owned by someone else.
Many easements are documented (and will be discovered in a title search when buying a piece of property) but others are not. When a party makes a claim on a land without permission for an extended period of time, it may result in a “prescriptive easement.” It’s up to the property owner to take action against someone making a claim on their land to prevent such an easement from becoming established.
That’s the central legal issue in a case that recently was decided by the Supreme Court of South Carolina, in which a Johns Island man took utility companies to court for claims on his newly purchased land. Before getting into the case, let’s talk more about easements first.
What Easements Are
Some examples of common easements are:
- Right of railroad company to install railroad tracks
- Right of utility company to install electric lines, water mains, etc.
- Rights of way allowing others to enter or cross the property, for example to reach a beach or roadway
An example of a prescriptive easement may be when a trespasser gains rights to some land after occupying it in a manner determined by state statute.
These are examples of positive easements, which allows for something to happen. Negative easements prevent something from happening. For example, a light-and-air easement may prevent someone from building an addition to their house that would block the view of their neighbors.
How Prescriptive Easements Are Established in South Carolina
To establish a prescriptive easement in South Carolina, three things must be shown:
- There was continued and uninterrupted use for a period of twenty years,
- The identity of the thing enjoyed,
- The use was adverse under claim of right.
To show adverse use, the use of the land must have been enjoyed “openly, notoriously, continuously, and uninterruptedly, in derogation of another’s rights.”
What does it mean to use land “openly” and “notoriously”? That’s one of the main legal issues in the case in hand.
Simmons v Berkeley Electric Cooperative
Roosevelt Simmons bought two parcels of undeveloped wooded land on Johns Island in 2003. Two previous owners had granted easements to Berkeley Electric, one in 1956 and one in 1972, to construct and keep transmission lines on the property.
In 1977, Charleston County authorized St. John’s Water to put in a water main along the road, using an “encroachment permit,” and the water main was completed in 1978. In 2005, Simmons found a water meter under some bushes on his property. He contacted the water company, who said they would not move the water main.
Simmons took action against Berkeley Electric and St. John’s Water over trespassing and unjust enrichment. Both companies moved for summary judgment, a judicial procedure commonly used when parties agree on the facts of the case and want to avoid or simplify the trial process, and received a ruling in their favor. The case went to the Court of Appeals, which also determined that Berkeley Electric and St. John’s Water had rights to use Simmons’ property, as both had established prescriptive easements.
A request for the Court of Appeals to rehear the case was denied, and the case was taken up by the South Carolina Supreme Court.
Failing the Test
In its decision (PDF), the Supreme Court agreed that Berkeley Electric had established a prescriptive easement. However, it didn’t agree that St. John’s Water had. That’s because St. John’s Water failed the “open, notoriously, continuously, and uninterruptedly” part of the test to establish a prescriptive easement.
Though the use was continuous and uninterrupted, it was not open and notorious. The water main was located in the ground and the water meter was discovered by Simmons under a bush, and therefore the use was not open. To be “notorious,” something “is actually known to the owner, or is widely known in the neighborhood.” The Court didn’t find clear and convincing evidence that neighbors or Simmons himself knew the location of the water main, which is what they would have had to prove.
Simmons did what any landowner who wants to protect their property rights should do – he took action. By ignoring someone else’s claim on your land, you may be helping them establish limited legal rights to it.
Contact Commercial Real Estate Attorney Gem McDowell About Your Property
Easements and property rights can be complex legal issues that need the advice of an experienced commercial real estate attorney. Gem McDowell has over 20 years of experience handling complex real estate transactions in South Carolina, including easements.
Call Gem McDowell Law Group in Mount Pleasant to reach Gem so he can help you with your commercial real estate transaction today. Schedule your free initial consultation today by calling (843) 284-1021 or filling out this contact form online.
Transmutation: When Non-Marital Property Becomes Marital Property
Consider this:
Sandra and James have been married for 25 years. Once they were married, she gave up her job to become a stay-at-home mom. When the kids were old enough, she began to work in her husband’s dental practice, which he established before they married, becoming an integral part of the business. If Sandra and James get divorced, does she deserve compensation for any part of the dental practice that she helped grow?
Marital And Non-Marital Property, And How Non-Marital Becomes Marital
Before answering that question, it’s important to understand the difference between marital and non-marital property. Marital property is property that belongs to the marriage, i.e., to both spouses. In a divorce, it is subject to equitable division by the court (if the couple has not come to an agreement about how to split up the property). A common example of marital property is a house that the couple purchases together during the marriage.
Non-martial property is owned by one spouse or the other, and is not considered to belong to the marriage. In a divorce, it will remain in the hands of its original owner. Examples of non-marital property include gifts made to one spouse only, inheritance, and assets that were brought into or existed before the marriage, such as cars, real estate, and investments, to name just a few examples. Property that was excluded through a pre- or post-nuptial agreement is also considered non-marital.
Although the law gives clear definitions of the two, the application becomes difficult in situations where non-marital property becomes marital property through the process of transmutation.
How Transmutation of Marital Property Happens
If non-marital property becomes “commingled” with marital property to the point that it can’t be distinguished, or it’s used by the spouses in support of the marriage, it can become marital property.
However, determining how much commingling is enough, or what use constitutes “support of the marriage” is not straightforward. The Supreme Court of South Carolina has heard a number of cases where application of the law has depended on how and when transmutation occurs.Here are three cases from the last few years as examples:
Case #1: Wife works in husband’s business and argues that it’s transmuted
Pittman v. Pittman (PDF), Feb. 2014
Gloria Pittman separated from husband Jetter Pittman after seven years together. Over the course of their marriage, she reduced her hours at her job as a nurse and instead spent more time working in her husband’s surveying business, until she was no longer eligible for health benefits or a retirement savings plan through her nursing job. Instead, she became an integral part of her husband’s business. When they divorced, she argued that the business, which her husband owned before coming into the marriage, had become marital property.
The Court agreed. A few key factors in the decision: the husband and wife agreed that she should essentially give up her nursing career to help with his business, the wife was involved in making major decisions regarding the business with her husband, and they structured her pay to benefit the two of them.
Case #2: Wife argues that husband’s inherited land is transmuted
Wilburn v. Wilburn (PDF), May 2013
Harriet and Paul Wilburn were married for over 30 years. They had a unique situation: he had a stroke in his mid-40s that left him partially paralyzed. He granted his wife power of attorney and she took control of some of his accounts. She later got breast cancer and then decided to seek divorce. In the split, she argued that a tract of land he inherited had transmuted and was marital property.
The Court disagreed. Although the Court found wife’s testimony that she had contributed to the management of the property to be credible, that wasn’t enough to establish transmutation. The Court also found that even though income from the land was used in support of the marriage, the property had not transmuted.
Case #3: Husband argues properties are non-marital
Conits v. Conits (PDF), Mar 2016
Peggy and Spiro Conits were married over 30 years before seeking divorce. He owned a number of properties prior to the marriage. She argued that the properties should be considered marital property.
The Court agreed. The income from a property he owned in the U.S. was used to support the marriage and to extinguish debts. He also owned a property in Greece, which the Court determined was marital property. In both cases, loans taken out on the properties were fully paid during the course of the marriage.
Keeping Marital and Non-Marital Separate
With the Court’s interpretation of what constitutes transmutation varying so widely between cases, it’s hard to know exactly what will and won’t qualify as transmutation. If you want to avoid transmutation of property, there are ways you can protect certain assets, for example, through a pre- or post-nuptial agreement.
For advice on protecting your assets, and on other issues of estate planning, contact estate planning attorney Gem McDowell at his Mount Pleasant office today. He can help you create a robust estate plan that takes care of your future needs and the needs of your whole family. Get in touch by calling (843) 284-1021 or by filling out this contact form online.
How to Determine 1099 or W-2 Status According to the IRS
Update, 02/15/2023: The Department of Labor’s Wage and Hour Division published a notice of proposed rulemaking on the subject of worker misclassification and how to correctly classify workers as employees or independent contractors; read more about this on our blog here. This rule would be in addition to the approach the IRS takes to worker classification described below.
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In business, the term “1099” usually refers to someone in an independent contractor position. The term comes from the IRS; at the end of the tax year, a 1099 worker receives a 1099 form from their employer rather than a W-2 that employees receive.
Employers may prefer to hire independent contractors rather than employees whenever possible for the main reason that they often cost less to employ. That’s because for employees, employers have to pay Social Security taxes, Medicare taxes, unemployment taxes, and withheld income taxes to the IRS, and carry workers’ compensation insurance to cover them. Also, employers often provide benefits such as health insurance and retirement plans to employees, but not to independent contractors.
How does an employer know how the worker they’re hiring should be classified? While in many cases it’s clear, in others it’s complicated. Here’s how to determine whether a worker in South Carolina is an employee who should receive a W-2 or an independent contractor who should receive a 1099.
Federal Versus State Definitions Of 1099 Independent Contractors
To illustrate the difference between a 1099 and W-2 workers, imagine two plumbing companies hire two plumbers, Jack and Jane. By the terms of employment, Jack must come to the office every day from 9-1, use the company’s truck and tools, and is told which jobs to do and when. By contract, Jill may show up at the office if and when she wants, drives her own truck and uses her own tools, and is told about jobs but not told when she must complete them or how. In this scenario, Jack would be classified as an employee, and Jill an independent contractor.
How workers are classified is of interest to both the federal and state government. The federal government – more specifically, the IRS – cares because it wants to know who will pay the withheld income taxes, Social Security taxes, Medicare taxes, and unemployment taxes for each worker. The state government cares because it runs the state’s workers’ compensation program and needs to know who is responsible for paying for a worker’s injury sustained on the job – the employer (for an injured employee) or the worker themselves (for an injured independent contractor)?
Because the federal and state government have different reasons for wanting to know a worker’s status, they use different standards to determine whether someone is an employee (W-2) or independent contractor (1099).
The IRS’s Definition of 1099 Independent Contractors
The IRS proposes three common law rules for employers to consider when classifying a worker:
- Behavioral: Does the employer control, or have the right to determine, how the worker does their job?
- Financial: Does the employer control the business aspects of the worker’s job? How is the work paid? Are expenses reimbursed? Does the worker provide their own tools, or do they use the employer’s?
- Type of Relationship: Are there written contracts or benefits? What is the nature of the relationship? Was the expectation upon hiring that the relationship would continue indefinitely?
If you’re still uncertain as to how to classify an employee, the IRS can make that determination for you. Fill out Form SS-8 (PDF) and the IRS will review it and make a determination in six months or more.
The Changing Definition of 1099 Independent Contractors in South Carolina
In South Carolina, the approach to worker classification relies on a four-factor model, which you can read more about on our blog here.
A 2015 South Carolina Supreme Court case, Lewis v. L. B. Dynasty (read it here), changed the standard for classifying a worker as an independent contractor, making it stricter in favor of the employee. As a result of this case, workers that previously had been classified as independent contractors may need to be reclassified as employees.
The background: An exotic dancer named LeAndra Lewis was injured when she was accidentally shot while working at the Boom Boom Room Studio 54 in Columbia, SC. She filed a claim for workers’ compensation for coverage of the medical costs of her injuries (which included the loss of a kidney) as well as temporary total disability.
Her claim was denied at first, as she was determined to be an independent contractor by both the single commissioner and the Workers’ Compensation Commission appellate panel. (Independent contractors do not have a right to workers’ comp benefits in South Carolina and employers do not need to carry workers’ comp insurance for them.) The Court of Appeals also affirmed this decision. The South Carolina Supreme Court, however, did not.
Taking the viewpoint that the law should be interpreted to be advantageous to the worker, the Court stated, “The question before the Court is a simple, fact-based consideration—did the Club exercise sufficient control over Lewis to create an employee relationship?” The Court looked at a variety of factors, including the right to, or exercise of, control; furnishing of equipment; method of payment; and right to fire to determine whether the worker should be an employee or independent contractor. Ultimately, the relationship was found to be of an employee nature. That meant Lewis was entitled to workers’ compensation for her injuries.
What The Supreme Court’s Decision Means For South Carolina Employers
South Carolina employers must be sure that their independent contractors meet the high standards the SC Supreme Court has set. The Court has said “we construe workers’ compensation law liberally in favor of coverage to further the beneficent purpose of the Workers’ Compensation Act.” In other words, it will tend to side with the worker and act in their favor rather than in the employer’s.
What happens if you’ve been treating a worker as a 1099 independent contractor when you should have been treating them as a W-2 employee? You may find an unwanted notice from the IRS stating that you owe back taxes for employees. Or your worker may become injured while on the job and sue you, leading to a long and expensive lawsuit. In short, it could cause a big headache and cost a lot of money. For many companies, either one of these scenarios could be devastating. It’s a good idea to review the nature of your independent contractors’ work and make sure they are truly independent contractors according to federal and state law.
Contact Mount Pleasant Corporate Attorney Gem McDowell for Advice
For advice on classifying employees, hiring and firing, contracts, and other aspects of starting or running a business, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group in Mount Pleasant, SC help businesses make smart and informed decisions in day-to-day and exceptional circumstances. Get in touch by calling (843) 284-1021 or by filling out this contact form online. Schedule your free initial consultation today.
