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Rhode Island Legal Blog

Monday, May 15, 2017

Top Five Estate Planning Mistakes

In spite of the vast amount of financial information that is currently available in the media and via the internet, many people either do not understand estate planning or underestimate its importance. Here's a look at the top five estate planning mistakes that need to be avoided.

1. Not Having an Estate Plan

The most common mistake is not having an estate plan, particularly not creating a will - as many as 64 percent of Americans don't have a will. This basic estate planning tool establishes how an individual's assets will be distributed upon death, and who will receive them. A will is especially important for parents with minor children in that it allows a guardian to be named to care for them if both parents were to die unexpectedly. Without a will, the courts will make decisions according to the state's probate laws, which may not agree with a person's wishes.

2. Failing to Update a Will

For those who have a will in place, a common mistake is to tuck it away in a drawer and be done with it. Creating a will is not a "once and done" matter as it needs to updated periodically, however. There are changes that occur during a person's lifetime, such as buying a home, getting married, having children, getting divorced - and remarried, that need to be accurately reflected in an updated will. Depending on the circumstances, a will should be reviewed every two years.

3. Not Planning for Disability

While no one likes to think about becoming ill or getting injured, an unexpected long-term disability can have devastating consequences on an individual's financial and personal affairs. It is essential to create a durable power of attorney to designate an individual to manage your finances if you are unable to do so. In addition, a power of attorney for healthcare  - or healthcare proxy, allows you to name a trusted relative or friend to make decisions about the type of care you prefer to receive when you cannot speak for yourself.

4. Naming Incapable Heirs

People often take for granted that their loved ones are capable of managing an inheritance. There are cases, however, when a beneficiary may not understand financial matters or be irresponsible with money. In these situations, a will can appoint an professional to supervise these assets, or in the alternative a "spendthrift trust" can be put in place.

5. Choosing the Wrong Executor

Many individuals designate a close relative or trusted friend to act as executor, but fail to consider whether he or she has the capacity and integrity to take on this role. By choosing the wrong executor, your will could be contested, leading to unnecessary delays, costs and lingering acrimony among surviving family members.

The Takeaway

In the end, estate planning is really about getting your affairs in order. By engaging the services of an experienced trusts and estates attorney, you can avoid these common mistakes, protect your assets and provide for your loved ones.

 


Monday, May 8, 2017

Who Owns A Business's Customer List?

Many businesses have customer lists that they consider their own private property.  It is common, however, for sales representatives and other employees to regard customer lists as theirs too, something they can take to a new employer. Employment agreements, confidentiality agreements, non-competes, and non-solicitation agreements can all be used to eliminate confusion over whether a customer list is transferable or not. 

In the absence of clear contractual protections, however, case law and state trade secret laws may decide whether a list is the exclusive property of a business.  If the list is a "trade secret," a business owner may have an easier time protecting it and obtaining damages for its use by ex-employees and competitors. The Uniform Trade Secrets Act, that has been adopted by most states and the federal Defend Trade Secrets Act provide for penalties and remedies for the misappropriation of trade secrets.

When is a list a trade secret?

Generally, a list receives "trade secret" protection if, first, it contains information not readily ascertainable from public sources.  Merely listing customers and general contact information is usually not enough to elevate the information to trade secret status. Second, owners must usually take some measures to keep the information confidential.

What steps can a company take to ensure that a list is viewed as a trade secret?

The following are elements which, when present, can lead to a customer list being deemed a trade secret.

• The list contains unique, non-public information about each customer, such as ordering history, needs and preferences, and private phone numbers and e-mail addresses.  The more a customer list contains valuable details compiled about each customer, the less likely a court is to say that the list could have been readily assembled from public sources. 

•  The list is marked "private" or "confidential," and employees are informed that it the property of the company. 

• Electronic versions of the list are password-protected, and access is limited to certain users.

• Printed copies are kept under lock and key.

• When the list is shared with third parties, there is a confidentiality agreement.

• The owner can show that time and effort were invested in building and maintaining the list.

A recent case involving former employees of an insurance company shows how these factors can influence a court.  In that case, the customer list contained more than just customer names, birth dates and drivers' license numbers.  It also contained laboriously compiled information about the amounts and types of insurance each customer had bought, the location of insured property, the personal history of policyholders, policy termination and renewal dates, and other potentially valuable details.  The list conferred a powerful, competitive advantage and the court deemed it a "trade secret."

Meeting the criteria spelled out in that case and in the suggestions above does not guarantee that a customer list will be deemed a protected trade secret.  It could, nonetheless, increase the odds.


Monday, April 24, 2017

The Parol Evidence Rule & How it Affects Your Contract

One of the purposes behind memorializing an agreement in a written document is to ensure that the parties to the contract do not recant what they originally agreed upon.  Often, parties may dispute contractual terms if contracts are not working out in their favor or are resulting in negative or unanticipated consequences.

When a document is drafted by an attorney, parties usually feel more confident and secure about the transaction. A legal document will help prevent any future deviations from its original intent because all aspects of the matter have been stipulated in the final written document.   

If there is any disagreement regarding the written contract, the court’s consideration of evidence is limited.  For example, the courts may look into the prior deals between the parties and check out industry practices as a means of comparison.  However, it is typically prohibited to admit evidence of prior agreements or negotiations of the parties on the same contractual matter at issue.

The court may also inquire as to whether the agreement is partially or completely integrated. A fully integrated document is one intended by the parties to represent all of the terms to the exclusion of any prior writings or oral agreements.  If the agreement is fully integrated, then all other information will likely be excluded. On the other hand, if the document is only partially integrated, the court may take note of circumstantial evidence if such evidence does not contradict the agreement. 

“Parol evidence” is generally oral evidence.  It is beneficial and may be admitted under certain circumstances after the parties agree to a final written agreement.  For example, if the parties to the contract made a mistake, such as omitting or mistakenly listing a term, parol evidence may be considered.  In that case, the option of bringing in subsequent agreements in limited circumstances may be available.  

Parol evidence also comes into play when the writing of the document is unclear or if there is a dispute as to the meaning of certain terms within the contract.  Finally, new evidence is admissible if there is illegality or fraud relating to the contract.  Conferring with a contract attorney will help to clarify how parol evidence rule may affect current and future dealings.


Monday, April 17, 2017

An Overview of Foundational Corporate Documents

There are a number of steps involved in forming a corporation from selecting a name, obtaining the necessary licenses and permits, paying certain fees, and filing foundational documents with the appropriate state agency. While an attorney can help prepare and file the required papers, the owners, officer and directors should have a basic understanding of these documents.

Articles of Incorporation

The first underlying document is the Articles of Incorporation which states the corporate name, and the  purpose of the business. This is typically a generic statement to the effect that the corporation will conduct any lawful business in the state in accordance with its objectives.  In addition, the type and amount of stock that will be issued (common or preferred) must be established. This document should contain any other pertinent information, including the name and address of a registered agent.

Corporate By-laws

By-laws are the formal rules regarding the day-today operations of a corporation. This document outlines the corporate structure and establishes the rights and powers of the shareholders, officers and directors. By-laws specify how officers and directors are nominated and elected as well as their responsibilities. In addition this document should clarify how disputes among the parties will be resolved. By-laws establish where and when meetings will be held, whether quarterly, annually or at other times, what constitutes a quorum, as well as voting and proxy rules. Lastly, this document should also contain information on the issuance of shares of stock and other operational details.

Meeting Minutes

After the corporate existence has begun, an initial organizational meeting of the principals must be held in order to adopt by-laws, elect directors, issue stock, and to conduct any other business. All of these activities must be memorialized in meeting minutes, which must also be prepared during any subsequent meetings.

Stock Certificates

Stock certificates are the record of any stock that was initially issued.

Once these foundational documents are in place, a corporation is also required to keep complete and accurate books and records of account and must maintain a record containing the names and addresses of all shareholders. All of these documents may fall under different names and the applicable laws vary from state to state. Because this is a complicated process and one that requires careful analysis, you are well advised to engage the services of an experienced business law attorney to help prepare and file the necessary foundational documents.


Monday, April 3, 2017

Capacity to Contract - Minors, The Mentally Disabled & The Intoxicated

The value and success of a business often rests on the ability of the principals involved to make and enforce contracts with third-parties.  However, if the person who entered into a particular agreement did not have the “capacity to contract” in the first place, then those contracts may be “voidable.”  A contract is “voidable” if it permits the person without legal capacity to either terminate or enforce the agreement.  This is meant to ensure that the weaker party does not get taken advantage of due to unequal bargaining power. 

Again, contracts become “voidable” at the discretion of the party who does not have the ability to execute an agreement.  The “capacity to contract” is an individual’s lawful competence “to enter into a binding contract.”  In other words, there is a presumption that certain individuals cannot understand what they are agreeing to.  This category typically includes mentally incompetent individuals or minors. 

Minors (typically those under the age of 18), do not have the legal power to form a contract.  However, if a minor does enter into a contract, he or she usually has the option to cancel while still under the age of 18. If the individual is no longer a minor and has not yet exercised the right to void the contract, the contract may be enforceable after the person has turned 18. 

Similarly, a person who is mentally incompetent can either have his or her guardian void the agreement or personally cancel it. Tests for mental fitness at the time a contract is signed vary from state to state. Nevertheless, minors and the mentally disabled may not be permitted to void contracts intended to provide them with necessities, such as clothing, shelter and food.   

Persons under the influence of alcohol or drugs do not usually have the same power to void contracts as do minors and the mentally disabled. Typically, intoxication is deemed a “voluntary” act and courts encourage intoxicated individuals to assume accountability for their actions.  If an individual was so inebriated as to be unable to appreciate “the nature and consequences of the agreement,” however, the intoxicated party may be able to void the contract. If another person used the intoxicated party’s condition as a means to take advantage of the situation, this can also be used as a loophole for the intoxicated party to void the contract. Anyone attempting to void a contract should consult with a savvy business attorney in order to explore the possibilities of viable options in his or her particular case.


Monday, March 27, 2017

Use of Non-Disclosure Agreements

As a small business owner, it is essential to protect sensitive information that is often referred to as trade secrets. While some well known examples of trade secrets include the formula for Coca-Cola and Google's algorithms, any business information such as practices and techniques, processes and procedures, needs to remain confidential. In some cases, business data such as client and vendor lists may qualify as a trade secret.

Although trade secrets and other confidential business information are protected by state and federal laws, it is crucial to secure this information through the use of a confidentiality or non-disclosure agreement. In sum, this is a legal contract between two or more parties in which the party receiving the sensitive information agrees not to reveal it to any other party without prior permission or authorization.

In situations in which a business engages with vendors or enters into a strategic alliance with a similar business, a separate, stand-alone agreement can be used. Similarly, confidentiality provisions can be incorporated into an employment agreement for employees who are given access to sensitive business information. In either case, common provisions included in these agreements include:

  • A definition of the confidential information (but usually not the protected information itself)

  • An explanation as to why the information is being provided to the receiving party

  • Terms under which the information may be disclosed to appropriate parties (such as on a need-to-know basis)

  • The circumstances in which the information may or not be used

  • The duration of time  the information must be kept confidential

In order for a non-disclosure agreement to be enforceable, it must be deemed fair. A court typically looks to whether an agreement is overly restrictive in making a determination of fairness. If the contract is unduly burdensome to the party receiving the information, a court may find all or part of the agreement invalid. If the information has already been revealed to a third party and the agreement is deemed to be invalid, a business may be barred from recovering damages for its losses. For this reason, it is crucial to consult with an experienced business law attorney who can help to prepare a well designed non-disclosure or confidentiality agreement.

 


Monday, March 13, 2017

Refusing a Bequest

Most people develop an estate plan as a way to transfer wealth, property and their legacies on to loved ones upon their passing. This transfer, however, isn’t always as seamless as one may assume, even with all of the correct documents in place. What happens if your eldest son doesn’t want the family vacation home that you’ve gifted to him? Or your daughter decides that the classic car that was left to her isn’t worth the headache?

When a beneficiary rejects a bequest it is technically, or legally, referred to as a "disclaimer." This is the legal equivalent of simply saying "I don't want it." The person who rejects the bequest cannot direct where the bequest goes. Legally, it will pass as if the named beneficiary died before you. Thus, who it passes to depends upon what your estate planning documents, such as a will, trust, or beneficiary form, say will happen if the primary named beneficiary is not living.

Now you may be thinking why on earth would someone reject a generous sum of money or piece of real estate? There could be several reasons why a beneficiary might not want to accept such a bequest. Perhaps the beneficiary has a large and valuable estate of their own and they do not need the money. By rejecting or disclaiming the bequest it will not increase the size of their estate and thus, it may lessen the estate taxes due upon their later death.

Another reason may be that the beneficiary would prefer that the asset that was bequeathed pass to the next named beneficiary. Perhaps that is their own child and they decide they do not really need the asset but their child could make better use of it. Another possible reason might be that the asset needs a lot of upkeep or maintenance, as with a vacation home or classic car, and the person may decide taking on that responsibility is simply not something they want to do. By rejecting or disclaiming the asset, the named beneficiary will not inherit the "headache" of caring for, and being liable for, the property.

To avoid this scenario, you might consider sitting down with each one of your beneficiaries and discussing what you have in mind. This gives your loved ones the chance to voice their concerns and allows you to plan your gifts accordingly.


Monday, March 6, 2017

Common Types of Will Contests

The most basic estate planning tool is a will which establishes how an individual's property will be distributed and names beneficiaries to receive those assets. Unfortunately, there are circumstances when disputes arise among surviving family members that can lead to a will contest. This is a court proceeding in which the validity of the will is challenged.

In order to have standing to bring a will contest, a party must have a legitimate interest in the estate. Although the law in this regard varies from state to state, the proceeding can be brought by heirs, beneficiaries, and others who stand to inherit. While these disputes are often the result of changes to the distribution plan from a prior will, some common types of will contests are as follows.

Lack of testamentary capacity

The testator, that is the person making the will, must have the mental capacity and be of sound mind at the time the will is executed , modified or revoked. Further, being of sound mind means that the testator knows what property he or she owns and understands the effect of executing the will. Although these are considered to be low standards, claims that the deceased lacked the mental capacity when the will was executed are common.

Undue influence

If the deceased was coerced into executing the will, it may be considered invalid. In order to ensure that the testator is not subjected to undue influence, the will should be prepared by an attorney. Moreover, heirs and beneficiaries should not take part in meetings and discussions between the testator and his or her attorney.

Will improperly executed

There are certain formalities that must be followed in order for a will to be considered validly executed. While some states require a notarized signature, others insist on a certain number of witnesses being present when the will is executed. If these formalities are not strictly followed, the will may be found to be improperly executed.

Fraud

A will can also be considered invalid if a person is intentionally deceived when preparing and executing the document.

The Takeaway

If a will is successfully contested, it can be declared invalid by the court. This means that the assets will be distributed either according to the terms of a prior will or if no such will exists, the state's intestacy rules. Ultimately, engaging the services of an experienced estate planning an attorney can minimize the risk of a will contest.


Monday, February 27, 2017

The Benefits of Incorporating in Safe Haven States

Many business owners believe it's best to incorporate in their home state, but there are often business and tax advantages available in other states. In particular, Delaware and Nevada are attractive to those who are looking to form a corporation. These so-called corporate haven states are considered to be business friendly.

The State of Delaware is well regarded for its supportive business and corporate laws, said to be among the most favorable in the United States. In addition, the state has a judicial body, the Court of Chancery, that is dedicated to business matters. This exclusive focus allows the court to hear cases quickly and efficiently.

Delaware also features a government agency that is focused on supporting businesses, the Division of Corporations. In particular, this agency has streamlined procedures for incorporating that allow businesses to hit the ground running. The Division boasts long hours and provides new businesses with easy access to important resources.

Lastly, the tax law in Delaware is amenable to corporations. A corporation that is formed, but does not conduct business, in the state is not liable for corporate income tax. Moreover, there is no personal income tax for those domiciled in the state or for shareholders that do not reside in Delaware.

Nevada is the second most popular state in which to incorporate. The state's business law affords favorable treatment to corporations. In particular, owners and managers of a corporation are rarely held responsible for the actions of the corporation in the state. Nevada also offers advantageous tax treatment to corporations with no personal income, franchise or corporate income tax.

Depending upon the exigencies of your business,  incorporating in Delaware or Nevada might be the best alternative. By engaging the services of an experienced business and tax law attorney, you can take advantage of these corporate safe havens.

 


Monday, February 13, 2017

What is an Estate Tax?

While the terms "estate tax" and "inheritance tax" are often used interchangeably, they are not synonymous. Let's try to clarify the difference.

Estate Tax

Estate tax is based on the net value of the deceased owner's property.  An estate tax is applied to these assets when they are transferred to the beneficiary. It is important to remember that an estate tax doesn't have anything to do with the beneficiary or that person's resources.

Federal estate tax only affects individuals who die with more than $5.45[s1]  million in assets and individuals with such large estates can leave that amount to their beneficiaries without being subjected to a  tax liability. Ninety-nine percent of the population will not owe federal estate tax upon their death.

In most circumstances, no federal estate tax is levied against spouses. As of the Supreme Court's recent ruling, this includes gay married couples as well as heterosexual couples. Federal estate taxes can, however, be charged if the spouse who is the beneficiary is not a citizen of the U.S. In such cases, though, a personal estate tax exemption can be used.  Even where remaining spouses have no liability for federal estate tax, they may be charged with state taxes in some states, taxes which cannot be avoided unless the couple relocates.

Inheritance Tax

Inheritance tax, as distinguished from estate tax, is imposed by state governments and the tax rate depends on the person receiving the property, and, in some locations, on how much that person receives. Inheritance tax can also vary depending upon the relationship between the testator and the benefactor. In Pennsylvania, for example, a spouse is not taxed at all; a lineal descendant (the child of the deceased) is taxed at 4.5 percent; a sibling is taxed at 12 percent, and anyone else must pay 15 percent.

Exemptions

There are exemptions that can reduce the amount of inheritance tax owed by significant amounts, but it is important that there be proper documentation of such exemptions for them to be applicable. Any part of the inheritance that is donated to charity does not require inheritance tax payment on the part of the beneficiary. Because of the inherent complexities of tax law and the variations from state to state, working with a tax attorney who has expertise with state tax laws s the best way to make sure you take advantage of any possible tax exemptions or avoidance.

 

Monday, February 6, 2017

What Does "Goodwill" Mean When Buying a Business?

Goodwill is an asset that is an intangible part of a business being purchased. In spite of its intangibility, goodwill may be worth more than concrete assets, such as property, buildings, machinery or inventory. Goodwill is the essence of the company's value to its customers, clients, and employees and, as such, is invaluable to any buyer. It is easier, as many people intending to purchase a business will tell you, to maintain goodwill than to establish it, since, among other things, goodwill takes time to build. Purchasing a business that already has established goodwill in the community can give the new owner a strong competitive edge. 

What Intangible Assets Compose Goodwill? 

Prospective buyers and sellers should be aware of the various aspects of goodwill. Not all will apply to every business, but aspects of goodwill include:

  • Brand name
  • Solid customer base
  • Good customer relations
  • Good employee relations
  • Patents or proprietary technology
  • General reputation
  • Future sales projection

 

Goodwill is a saleable asset, presumed to generate sales revenue and customer continuity. Having been established over years of honest and efficient behavior by the previous owner, it is transferable to the buyer, assuming the buyer maintains the pre-established excellent business practices.

How Is Goodwill Established?

As mentioned, goodwill can only be established over a period of years during which it is nourished and maintained. In business, it is assumed that expenditures have been involved in creating and preserving goodwill. Steps taken to do this include: 

  • Healthy and continuous investment in promotion
  • Maintenance of necessary quantity of high quality customer supplies
  • Support of excellent relationships with both customers and suppliers
  • Maintenance of efficient and respectful management and employees relationships
  • Establishment and maintenance of corporate identity and image
  • Keeping up an appropriate location

How Is Goodwill Evaluated?

 There is no set price for goodwill, though it very definitely features in sales negotiations. Generally speaking, goodwill is reflected in the amount in excess of the firm's total value of assets and liabilities. In well-established businesses, goodwill may be reflected in a price several times higher than the firm's physical assets alone would be reasonably worth.

There are several complex methods by which business goodwill can be calculated so it is essential to have a highly competent business attorney involved in the negotiation process


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