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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.

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.

Avoid the Pitfalls of Estate Planning in “Brady Bunch Marriages”

“Brady Bunch marriages” – in which spouses bring their kids from prior relationships into the new marriage – pose a number of potential problems when it comes to estate planning. Imagine the following scenarios:

Husband and wife sign an “I Love You will” which leaves everything to the other spouse upon death. The husband dies first, and all his assets go to his wife. When she dies, all her assets go to her children, as is very common in a simple will. In this case, the husband’s children get none of his estate; they were bypassed entirely.
Husband promises to “do the right thing” if his wife dies before him and ensure that her children get some of her money, even though he inherits it all. Upon her death, he decides to keep the money himself, giving her children nothing.
Husband wants to leave a third of his assets to his wife, a third to his children, and a third to his wife’s children. The wife wants to leave all of her assets to her children.

You can see how any one of these scenarios could lead to legal complications. More importantly, situations like these can tear apart formerly loving families and lead to resentment, disillusionment, and anger. How can they be avoided?

Be Deliberate About Your Estate Plan

If your family situation is complicated, you owe it to yourself and your family to have an estate plan that will carry out your wishes when you die. You have many options, but here are three possible choices:

Option 1. You split your assets up in your will and give some to your spouse, the rest to your kids.

Option 2. You and your spouse sign a waiver stating that there will be no claim to the spouse’s assets upon death, nor any right to them. The kids get everything. (See below for more information on this type of waiver.)

Option 3. You put your assets in a trust which your spouse can enjoy limited privileges from during their lifetime, and upon their death, the trust automatically passes to your kids. Note there are many different kinds of trusts, so make sure you’re getting the right kind for your particular situation.

Your assets are yours to distribute as you see fit and you can use wills, trusts, and other tools to make that happen. It’s smart to have an estate planning attorney review your documents regularly so you don’t experience any unintended consequences of bad estate planning.

Spouses Are Automatic Heirs, Unless You Disinherit Them

As a married person in South Carolina, your spouse has a very strong claim on your property in the case of divorce or death. If you die without a will, they get either all or part of your estate. Even if you die with a will that says you don’t want them inheriting any of your assets, the law may say otherwise. The reason is because you cannot disinherit a spouse without their consent.

In South Carolina, you have three ways to disinherit a spouse:

1) Sign a prenuptial agreement

2) Sign a postnuptial agreement

3) Sign a waiver of elective share before or after marriage

Both spouses must sign a waiver of elective share that waives their rights to their spouse’s assets upon death, in whole or in part. However, this waiver does not waive either spouse’s rights to the other’s assets upon divorce, so it’s different from a prenuptial or postnuptial agreement.

To get a waiver of elective share, both spouses must present an accurate picture of their financial status to the other, so the waiver is made with full knowledge of what they are waiving their rights to. In cases where there’s a large discrepancy in amount of money (i.e., one spouse has a lot of money while the other one has very little), it’s wise for both spouses to retain their own lawyers.

Waivers of elective share aren’t particularly common, but they’re worth considering if you are sure you don’t want your spouse inheriting your property upon your death.

Be Explicit in Your Estate Planning

To illustrate how strong the claim a person has on their spouse’s property, consider this example.

A couple decides to get divorced. They file for divorce on January 1st. On September 1st, they have a hearing. On September 25th, the court orders for divorce. Two days later, the husband dies. A few days after that, on October 1st, the judge signs the order for divorce. In this case, even though the couple was in the process of getting divorced, the surviving wife was entitled to a portion of her deceased almost-ex-husband’s estate because on the day he died, they were still technically married.

What if you’re going through a divorce and don’t want your spouse to claim any of your assets should you unexpectedly die? At this point, it’s highly unlikely that you’ll be able to persuade them to sign a prenup, postnup, or waiver of elective share. This is all the more reason not to delay in the divorce proceedings.

Work With An Experienced Estate Planning Attorney

As you can see, estate planning gets complicated once you factor in divorce and add children from previous marriages, children from new marriages, and second (and third and fourth…) spouses. If you’re in this situation, be sure to work with an attorney who has experience with estate planning for blended families, particularly with trusts and elective share.

If you’re in South Carolina, contact estate planning attorney Gem McDowell. He has extensive experience handling estate planning for “Brady Bunch marriages” and is aware of the pitfalls of standard estate planning. He are ready to help you with your complicated estate planning needs at their law office in Mt. Pleasant. Get in touch online or call them today at (843) 284-1021 to schedule your consultation.

Why a Judgment in Your Favor is Not as Great as You Think

If you’re awarded a judgment, don’t celebrate just yet – it may not be the windfall you think it is.

A judgment is a decision of the court that comes about after a lawsuit is settled or threatened. For example, let’s say Tony is driving and runs into Victoria’s house, causing a large amount of damage. She may end up with a judgment against Tony in the amount of $100,000 for the damage sustained to her property.

That’s great! $100,000 is a lot of money, right?

Yes, it is – if she can ever collect it.

A Judgment is Not a Guarantee of Payment

Unlike a settlement, which is money in the hand, a judgment is more like a mortgage, as it attaches to any real property of the person against whom the judgment is placed – in this case, Tony. Sometimes that money can be collected immediately, sometimes at a later date, and sometimes not at all.

The reason that money often can’t be collected is because of exemptions established in the law. If the judgment is against an individual (not a business), the law protects that individual’s property up to certain amounts, meaning the judgment can’t be taken from those assets up to those limits.

For example, the exemption amount for the primary residence for an unmarried person is $59,100, or $118,200 if married. If Tony is married and owns a $200,000 house, and has a $100,000 mortgage, Victoria can’t expect to collect her $100,000 even though it appears as though he has twice as much money as she’s trying to collect. It can’t be collected on because it’s protected.

Other assets are protected up to certain dollar limits. For the year 2016, these amounts are:

(Note that this list is not exhaustive.)

The dollar amounts for exemptions are updated in even-numbered years in South Carolina.

What Does it Really Mean to Have a Judgment in Your Favor?

Whether your judgment ends up being worth more than the paper it’s written on depends on the person you’re collecting against. Having a judgment in your favor means that the person it’s against does owe you that money, whether they end up having to pay it or not.

Also, judgments are mobile. A judgment is filed in the County where the incident or damage occurred, but the judgment can follow the debtor across county and state lines. A judgment can even follow someone to other countries, depending on the treatises the U.S. has with other countries. In short, if there’s a judgment against you, don’t think you can outrun it by moving to a different city, state, or country.

A judgment lasts for 10 years in South Carolina (each state has its own laws regarding judgments), so if in that time Tony sells or refinances his house, Victoria can collect the money she’s owed. Unfortunately, sometimes there’s never an occasion to collect. Maybe Tony never sells his house, or maybe his house is in his wife’s name only.

If the person you have a judgment against is very wealthy, and/or has a second residence, you can likely collect relatively easily. If not, you may have to work a little harder to get your money.

How Do You Collect a Judgment You Have Against Someone Else?

To “execute against the judgment,” you can have the sheriff try to collect. In the majority of these instances, the debtors say the same thing: “I have no money.” The sheriff returns with a nulla bona execution, which means “no good.”

After this, the next step you can take is to put the debtor on the stand and with the judge go through the debtor’s tax returns and other financial documents to see if they really do have the money to pay.

Need More Information on Judgments?

If you’re trying to collect on a judgment, or you’ve got a judgment against you and you want to know what your options are, contact Gem McDowell at Gem McDowell Law Group. You can reach Gem at their Mount Pleasant law office by calling (843) 284-1021 or by filling out this contact form online. Get in touch and schedule an appointment today.

How South Carolina Courts View Covenants Not to Compete

On the surface, covenants not to compete look simple. One party agrees not to compete against another party – either by working for a competing company, or by starting their own competing company – for a specified amount of time and within a specified location. But as simple as they seem, covenants not to compete aren’t so straightforward.

When two parties end up disagreeing over a covenant not to compete, the matter sometimes ends up in the South Carolina Court of Appeals. That happened recently, in a matter called Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., as recorded in the May 4, 2016 Advance Sheets (pdf). This case shows how the courts of South Carolina view and enforce covenants not to compete, and why, as a business owner, it’s important to do everything you can to draw up covenants not to compete that are enforceable.

The Background: Seller’s Remorse

In 2007, Seller sold its mortuary transportation business to Buyer. Among other things, the two parties agreed that 1) Seller would not provide mortuary transportation services within 150 miles of the business for a period of ten years after the sale, and 2) Buyer would buy certain types of body bags exclusively from Seller (at discounted prices) for ten years.

The terms of the sale worked well for several years, but then two things happened.

First, in 2011, Richland County sent out an RFP (request for proposal) for mortuary services. As part of the sale, Buyer had bought an existing contract for mortuary transportation services with Richland County. The covenant not to compete would bar Seller from providing mortuary services to Richland County for 10 years from the date of sale, because it was located within the agreed upon 150-mile radius. However, Seller was interested in submitting an RFP.

Second, Seller accused Buyer of breaking their agreement by purchasing body bags from someone other than Seller. It was found that Buyer had purchased over $45,000’s worth of body bags from Seller since 2007, but had also purchased $478.50’s worth of body bags from a third party. Because Buyer was in breach of contract, Seller said, Seller was no longer bound by the rules of the covenant not to compete.

Seller ended up winning the contract with Richland County. Buyer wasn’t happy.

The case was tried in late 2013, and the judge (actually a court-appointed special referee) found in favor of Buyer. Seller appealed and the decision by the South Carolina Court of Appeals is recorded in the May 4th Advance Sheets.

The Court of Appeals’ Verdict: Throw out the Baby With the Bathwater

The Court of Appeals did not agree with the lower court.

The lower court held that the terms of the covenant not to compete were “reasonably limited” in time and geographic scope. The Court of Appeals disagreed, stating, “In our view, the 150-mile restriction was overly broad and did not protect the rights and interests of [Buyer] in a reasonable manner.”

The Court also wrote that “In South Carolina, our courts will generally uphold and enforce a covenant not to compete arising out of the sale of a business if it is (1) reasonably limited as to time and territory, (2) supported by valuable consideration, and (3) not detrimental to the public interest.”

So for a covenant not to compete to be enforceable in South Carolina, it must meet all three requirements. If it fails one of the requirements, the entire agreement becomes void. Some other states allow courts to “blue pencil,” which means a court can say something like “150 miles is too much, but 50 miles is acceptable, so the rest of the agreement remains intact except for this part.” Not South Carolina. It throws the baby out with the bathwater.

Because the covenant not to compete in question failed to satisfy requirement #1, the entire covenant is not enforceable.

What it means for the parties: Seller is free to provide mortuary services in South Carolina without the restrictions originally laid out in the terms of the sale. Buyer lost a valuable contract as well as a competitive advantage because the covenant not to compete wasn’t enforceable. What Buyer thought was a smart move – restricting business activities of Seller in the manner it did – didn’t end up working out.

Why 150 Miles Wasn’t “Reasonable”

The United States is a large country. From Washington, D.C. to San Francisco, it’s over 2,400 miles. So restricting a business within a 150-mile radius doesn’t seem like a large area. How could that be “unreasonable”?

But consider the State of South Carolina. If you buy a business in Columbia, is it reasonable to expect the seller to abstain from business within a 150-mile radius? Columbia to Hilton Head is 125 miles as the crow flies. Columbia to Myrtle Beach is also 125 miles. And it’s just shy of 100 miles to Greenville. The seller would effectively be barred from conducting business in the entire state.

Also consider that the State of South Carolina is just over 30,000 square miles. The area in a circle with a 150-mile radius (πrr) is over 70,000 square miles – more than twice the area of the State of South Carolina.

150 miles doesn’t seem quite so reasonable now.

How to Determine “Reasonable” Geographic Restriction

It would be helpful to business owners if the courts would give a firm number that’s reasonable. But it doesn’t work that way. Among other things, the nature of the individual business determines what’s reasonable.

One way to think of it is how far a customer would travel to patronize a business. Would a customer drive 20 miles to go to a convenience store? Unlikely. That’s like driving all the way from Isle of Palms to Avondale in West Ashley. The vast majority of people are not going to drive that far for a soda and a lottery ticket. So in this example, even a 20-mile radius would be too large.

Or think of it from the salesperson’s point of view. Could a company that installs pools expect to serve customers in both Summerville and Folly Beach (a distance of 35 miles)? Possibly, yes. In this example, a 20-mile radius might be perfectly reasonable.

What You Should Do

Before drawing up or signing any covenant not to compete in South Carolina, take time to see if it will satisfy the three requirements listed above. In particular, look at restrictions on time and geographic scope. Consider the nature of the business you’re selling or buying to determine what seems reasonable. Don’t be greedy; that’s often the underlying case of such disputes. Rather, be conservative. You stand a better chance of having an enforceable agreement if you do.

You should also seek out the advice of an experienced business attorney like Gem McDowell. Contact Gem at their Mount Pleasant office at (843) 284-1021 today.

What You Need to Know About Section 1031 “Like-Kind Exchanges”

Under Section 1031 of the US Code, you can sell a qualifying property, take the money from that sale, and buy new qualifying property of a “like-kind” without paying any federal income tax on the first sale. This is what’s known as a “1031 Exchange” or a “Like-Kind Exchange.”

For example, let’s say you own an investment property that you bought for $15,000 in 1965, which is now worth $250,000. You want to sell that property and buy a new investment property. If you simply sold the property, you’d need to pay income taxes on the gain of $235,000. At around 33% for combined federal and state taxes, you’d pay approximately $77,550 in taxes – a substantial amount of money.

But, under 1031, you’re allowed to exchange that property for “like-kind” property and defer paying taxes on the gain. (Note that you are deferring taxes, not eliminating them altogether.) It’s a great tool for businesses and individuals to use to reduce tax bills and manage cash flow during the year.

How Like-Kind or 1031 Exchanges Work

How does an exchange of like-kind property work under Section 1031?

Using the example above, you’d sell your property (the “Relinquished Property”) and the money would go into an account controlled by a neutral third-party agent (the “Qualified Intermediary”), often an attorney or CPA, someone who has not done any work for you in the past two years. You cannot touch the money from that sale, and neither can your lawyer or CPA. Otherwise, the money is disqualified and subject to taxation.

Generally, you have 45 days to find a Replacement Property from the date of sale of the Relinquished Property and 180 days to close on that Replacement Property. The Qualified Intermediary purchases the like-kind property (the “Replacement Property”) with the money from the account you never touched, puts the Replacement Property in your name, and the process is complete.

What does “like-kind” mean?

It means that the property that’s being exchanged is of the same character. You can trade livestock for livestock or investment property for investment property, for example. You cannot trade livestock for investment property under Section 1031. However, you may exchange property that “differ[s] in grade or quality,” meaning that you may essentially “upgrade” your property or assets. Determining what qualifies as Replacement Property is done on a case-by-case basis.

What type of property is eligible for like-kind exchange under Section 1031?

Most property that is solely for business use is eligible, including investment property, livestock, vehicles, machinery, equipment, and other items of tangible property. Intangible property such as copyrights and patents qualify, too.

What type of property is not eligible?

According to the IRS, “inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets” are not eligible. Real property for personal use, i.e., a personal residence, is not eligible. It must be used for trade or business only.

What if you do not spend all the money you made from the sale within 180 days?

Money left over at the end of the 180-day period is commonly known as “boot.” If you cannot locate property that costs as much as the property you sold, or you are unable to close within 180 days, you will need to pay taxes on the boot.

What if you receive money or other types of property that are not like-kind in the exchange?

“Boot” can also refer to the value of goods received in the exchange that are not qualifying. If your exchange results in boot, you’ll need to pay taxes on it. (Though if the exchange results in a loss, it won’t be recognized.)

What about property that has debt attached to it?

Let’s say in the example above, you don’t own the house free and clear but have borrowed $100,000 against it. You sell the house and now have $250,000. In the exchange, you need to buy a Replacement Property that has as much equity and as much debt as the Relinquished Property. Otherwise, the IRS sees that you’re better off after the transaction, which is not the intent of the code, and you’ll need to pay tax. You need to “roll” what you made and what you owe to your new property.

What about state taxes?

The laws on how states handle taxes vary from state to state. In South Carolina, the law recognizes like-kind exchanges and will defer taxes on exchanges as long as the Relinquished Property and the Replacement Property are both located within the state of South Carolina. If you sell Relinquished Property in South Carolina and buy Replacement Property in North Carolina, for example, you can defer your federal taxes on the sale under 1031, but you will be responsible for the gain earned on the sale of the Replacement Property to South Carolina.

Who is eligible to do a 1031 Exchange?

Any entity that is exchanging qualifying property used solely for business. A corporation, partnership, LLC, individual, or trust may take advantage of Section 1031 as long as the property qualifies. A business may exchange equipment, or an individual may exchange investment rental property, for example. Dealers are not eligible for Section 1031 treatment.

How much does it cost to execute a 1031 Exchange?

Some businesses shy away from 1031 Exchanges because they believe it will cost a lot of money. In South Carolina, you can carry out a Like-Kind or 1031 Exchange for around $1,500 or $2,000. This small amount of money could end up saving you or your business thousands or tens of thousands of dollars in taxes. In a large majority of cases, it’s a worthwhile investment.

Could your business benefit from tax deferral from a Like-Kind Exchange?

This is just the start; there are more nuances to exchanges under 1031. If you want to know whether a 1031 Exchange could be a good tool for your company, contact Mount Pleasant corporate attorney at Gem McDowell Law Group. Send us a message or call us today at (843) 284-1021 today.

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 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.

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