Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, a Certified Public Accountant and Utah-licensed attorney. For over seven years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Introduction to Probate Proceedings

One of the primary purposes of the probate process is to provide an efficient system for liquidating the estate of a decedent and making distributions to his or her successors in interest. When someone passes away with assets titled in their name, a system must be in place to deal with those assets and transfer them to the proper party. State courts oversee the probate process and have jurisdiction over (1) the estates of decedents who were domiciled in that state at death and (2) property located in that state belonging to decedents who were domiciled elsewhere. Venue for a probate proceeding is in the county where the decedent was domiciled at death or, if they lived elsewhere at death, in any county where property of the decedent was located.

If a decedent owned property in a state other than the one where the probate case is opened, an "ancillary" probate proceeding may be commenced in the other state. The personal representative accomplishes this by filing in the court of the ancillary jurisdiction authenticated copies of his or her appointment order or other certification of authority.

All property of a decedent devolves to persons named in their last will or, if there is none, to the decedent's heirs at law. In order "to be effective to prove the transfer of any property or to nominate a personal representative, a will must be declared to be valid" by a court. Thus, contrary to popular belief, a will does not avoid probate, it merely provides instructions to the probate court. Regardless of whether the decedent left a will or not, certain probate property can be distributed without a probate proceeding pursuant to a small estate affidavit.

Probate proceedings in Utah can be formal or informal. The key distinction in the commencement of a formal proceeding is that a court hearing is required before a court will appoint a personal representative. While no hearing is required to commence an informal proceeding (making it less costly and faster at the outset) the downside of informally probating a will is that any heir or devisee, even if they didn't object to the informal probate of the will, can subsequently petition the court to set aside the informal probate of the will.

In summary, the four primary types of probate proceedings are (1) informal probate in intestacy (no will), (2) informal probate of a will, (3) formal probate in intestacy, and (4) formal probate of a will. If all heirs will affirmatively agree on the key aspects of the probate proceeding and there is no will, informal probate will likely suffice. If such agreement cannot be obtained and there is a will, formal proceedings should be considered.

Estate Planning Fundamentals

Every estate plan should include a last will, power of attorney, and health care directive; additional benefits can be realized by including a revocable living trust. Each document serves a particular and important purpose that cannot be served by any of the other documents; these purposes are described below.

A last will and testament specifies who will receive and who will manage and distribute your assets upon your death. It also names a guardian for your minor children. If you pass away without a will, you are said to have died “intestate,” and the laws of the state will determine who receives your assets. In addition, since all minor children under 18 years of age must have a guardian, a guardian will be selected for your children through a judicial process if you pass away without a valid will.

A will does not allow your estate to avoid the probate process; it simply gives directions to the probate court, and a will must be probated in order to be effective. Probate is the legal process for establishing the validity of your will and transferring your “probate property” in accordance with your will. However, incorporating a revocable living trust into your estate plan can allow you estate to avoid the probate process and achieve additional planning objectives.

A revocable living trust is essentially a contract whereby you, as “grantor,” transfer your assets to a “trustee” with specific instructions contained in the trust agreement describing how the trust assets are to be managed. You will typically serve as the initial trustee of your revocable living trust as well as the grantor, meaning that you retain complete control over all of your assets while you are living. A trust can be an especially useful tool for reducing estate taxes that would otherwise be owed or establishing protective trusts for the benefit of your descendants upon your death.

When the grantor of a trust passes away, the successor trustee distributes the trust assets according to the instructions in the trust agreement. This is the mechanism for avoiding probate; the successor trustee legally takes over the management and distribution of your estate. Any property transferred to your revocable trust will avoid probate. Note that some assets pass by operation of law without the need for a trust or probate; these include property held in joint tenancy with rights of survivorship, retirement plans and life insurance policies that have a beneficiary designation, payable-on-death bank accounts, etc.

If you have a revocable living trust, you still require a last will and testament just in case an asset remains in your estate upon death. If your plan includes a trust, your will is often referred to as a “pour-over” will since it simply directs that all of your assets be “poured-over” into your trust to be disposed in accordance with its terms.

A durable power of attorney authorizes whoever is named in that document to act on your behalf to the extent authorized in the document. This document is effective if you are physically or mentally incapacitated, but ends upon your death; this allows another individual to manage your affairs during any time that you are unable. A power of attorney may be drafted so that it is effective from the moment it is signed, or may become effective only if you become incapacitated. After death, the successor trustee of your revocable living trust (or the personal representative named in your will if you do not have a living trust) will possess the powers of management and the right to distribute your assets to your beneficiaries.

An advance health care directive specifies your preference for health care treatment, such as whether life support systems should be continued if there is no hope of recovery. It also appoints someone else to make these decisions for you if ill health prevents you from being able to specify your own wishes. An estate plan may include any number of addition documents, but these are the basics.

More Guidance on IRS Online EIN Applications

The owner of a new business entity can obtain an Employer Identification Number online from the IRS at no charge; in a previous post, I described how to resolve error codes in the online EIN application form. Alternatively, the owner can complete IRS Form SS-4 and submit the form to the IRS so that an IRS agent can assign the EIN. Finally, the owner of a business can enlist the assistance of someone else to obtain an EIN on his or her behalf; such person is known as a "Third Party Designee."

Before a Third Party Designee can obtain an EIN number, he or she must have an IRS Form SS-4 signed by the business owner with the Third Party Designee section completed. This authorizes the designee to receive the entity’s EIN and answer questions the IRS may have about the completion of the form. The requirement that the designee have a completed Form SS-4 signed by the business owner applies regardless of whether the designee is submitting the Form SS-4 to the IRS or applying for the EIN online; however, the designee will not need to actually produce the Form SS-4 if the online application process is utilized.

According to the IRS, a designee who has a signed SS-4 and intends to obtain an EIN online for the business owner must also have the taxpayer sign an additional statement: "The taxpayer must read and sign a statement that he/she understands that he/she is authorizing the third party to apply for and receive the EIN on his/her behalf, and answer questions about completion of the form. A copy of the signed statement must be retained in the third party's files." This additional statement is clearly in addition to the SS-4, because the designee must certify in the online application process as follows: "The taxpayer has completed and signed a Form SS-4, including the TPD Section and has read and signed a statement authorizing me to apply for and receive an EIN on his/her behalf. I have retained copies of both documents in my files."

Oddly, the Form SS-4 instructs the business owner to complete the Third Party Designee section if they "want to authorize the named individual to receive the entity’s EIN and answer questions about the completion of this form." It is difficult to see what additional benefit arises when the business owner signs the additional statement because it is substantially similar to a statement already appearing on the SS-4. The requirement for the additional statement only arises if the designee is utilizing the online application process, but the additional statement isn't even required to expressly state that the online application process will be used. Nevertheless, these two documents are what a third party designee is instructed by the IRS to obtain and retain in their files.

Covenants Not to Compete

A covenant not to compete is an agreement between an employer and an employee whereby the employee agrees not to engage in a business similar to the employer's business, thereby competing with the employer's business. Under common law in Utah, such covenants are not enforceable unless they are "supported by consideration, negotiated in good faith, necessary to protect a company's good will, and reasonably limited in time and geographic area." TruGreen Companies, L.L.C. v. Mower Brothers, Inc., 199 P.3d 929 (2008).

Until 2016, Utah had no statute governing the enforceability of covenants not to compete. However, the Post-Employment Restrictions Act now voids any covenant not to compete entered into on or after May 10, 2016 that lasts more than one year from the date on which employment ends. This restriction supplements any additional restrictions provided for by common law. This one-year maximum does not apply to nonsolicitation, nondisclosure, or confidentiality agreements; it also does not prohibit severance agreements or business sale agreements which include covenants not to compete.

Importantly, the current law provides an award of arbitration and court costs, attorney fees, and actual damages for an employee if an employer has sought to enforce a covenant not to compete that is found to be unenforceable. Proposed legislation would further protect employees by voiding covenants not to compete that are signed in exchange for mere continuation of employment at the same position and pay level. This proposed law would also void covenants not to compete if an employer fires the employee without cause within six months of the employee's signing the covenant not to compete.

Covenants not to compete can protect an employer's legitimate business interests and should be considered anytime an employee is hired. It is also critical to consider whether an existing covenant not to compete will restrict someone desiring to start a new business. In summary, these contracts are important throughout the entire life cycle of any business.

Planning with Multiple Person Accounts

There are many reasons why you might desire to involve someone else with your bank account. You may want to share ownership of the funds in the account. You may want another person to receive the funds in the account upon your death. You may simply want another person to have the ability to facilitate transactions without any ownership or survivorship rights. You may have more than one of these objectives. In order to create more predictability in light of each of these objectives, the Uniform Law Commission produced the Uniform Multiple Person Accounts Act, which has been adopted in many states.

There are three types of multiple-person accounts under the uniform law: joint accounts, pay-on-death accounts, and trust accounts. It is critical to understand the rights you are granting to another person by involving such person with each of these kinds of accounts. A trust account allows a person to serve in a trustee or agency role with respect to the funds without ever obtaining a beneficial interest. Funds remaining in a pay-on-death account on the death of the owner become the property of the pay-on-death beneficiary.

The key feature of a joint account is that while the funds "belong" to the contributor of the funds, any party to the account may unilaterally withdraw the funds in their entirety. The contributor may attempt to recoup funds that they contributed and which another party has wrongfully withdrawn, but this is a difficult and expensive process. Most people assume that the surviving owner of a joint account will necessarily own the remaining amounts in the account upon the death of the other owner, but technically, a joint account may or may not have these survivorship rights.

If your intent with respect to your account is both (1) that another person receive the remaining balance of the account upon your death and (2) that they also "own" the account during your life, then a joint account with right of survivorship makes sense. However, if you have objective (2) but not objective (1), you should ensure that the joint account has a pay-on-death option in lieu of a right of survivorship. On the other hand, if you have objective (1) but not objective (2), you should definitely not have a joint account, but rather a pay-on-death account.

If you have neither objective (1) nor objective (2), but rather simply desire that someone have the ability to facilitate transactions on the account, that person should simply be made trustee of a trust account of which you are the beneficiary. Better yet, a proper estate plan can also facilitate each of these objectives and provide many additional benefits as well.

50 States' Disclaimer of Property Interests

A disclaimer is the refusal to accept the right to receive property. Disclaiming a property interest is an estate, gift, and generation-skipping tax avoidance technique allowed by Section 2518 of the Internal Revenue Code, and the right to disclaim is codified in each states' statutes. A disclaimer is also useful where a person simply does not want the property they would otherwise receive.

The Uniform Law Commission has completed a uniform Disclaimer of Property Interest Act that has been adopted by 20 jurisdictions; a prior version has been adopted by 11 jurisdictions. The American College of Trust and Estate Counsel has an old but somewhat useful summary of each states' law on this matter located here.

Below are current references to each states' property interest disclaimer statutes. This post will be updated as laws change; please comment below if you come across any incorrect or outdated information:

 Ala. Code § 43-8-290
 755 ILCS 5/2-7
 §72-2-811, MCA
 Rhode Island
 R.I. Gen. Laws § 34-5-1
 A.S. § 13.70.010
 I.C. § 32-17.5-1-0.2
 Neb. Rev. Stat. § 30-2352
 South Carolina
 S.C. Code § 62-2-801
 A.R.S. § 14-10001
 Iowa Code § 633E.1
 N.R.S. § 120.100
 South Dakota
 SDCL § 29A-2-801
 Ark. Code § 28-2-201
 K.S.A. § 59-2291
 New Hampshire
 RSA § 563-B:1
 T.C.A. § 31-1-103
 Ca. Prob. Code § 260
 KRS § 394.035
 KRS § 394.610
 New Jersey
 N.J.S. § 3B:9-1
 Tex. Prop. Code § 240.001
 C.R.S. § 15-11-1201
 La. C.C. § 947
 New Mexico
 N.M.S. § 46-10-1
 Utah Code § 75-2-801
 Conn. Gen. Stat. § 45a-578
 18-A M.R.S. § 2-801
 New York
 N.Y. Est. Powers and Trusts Law § 2-1.11
 14 V.S.A. § 1951
 12 Del. C. § 601
 Md. Code, ET § 9-216
 North Carolina
 N.C. Gen. Stat. § 31B-1
 Va. Code § 64.2-2600
 District of Columbia
 D.C. Code § 19-1501
 Mass. Gen. Laws ch. 190B, § 2-801
 North Dakota
 N.D.C.C. § 30.1-10.1-01
 RCW § 11.86.011
 Fla. Stat. § 739.101
 M.C.L. § 700.2901
 R.C. § 5815.36
 West Virginia
 W. Va. Code § 42-6-1
 O.C.G.A. § 53-1-20
 Minn. Stat. § 524.2-1101
 Okla. Stat. tit. 60, § 751
 Okla. Stat. tit. 84, § 22
 Wis. Stat. § 854.13
 H.R.S. § 526-1
 Miss. Code § 89-21-1
 O.R.S. § 105.623
 W.S. § 2-1-401
 Idaho Code §15-2-801
 §469.010, RSMo
 20 Pa.C.S. § 6201

Avoiding a Partnership Tax Return Filing Requirement

According to the IRS, a partnership is a "relationship between two or more persons who join to carry on a trade or business..."  No formal agreement is required; in fact, a partnership can be formed inadvertently, in which case an IRS Form 1065 partnership tax return must be filed.  However, there are a few situations where two or more persons can carry on a trade or business without creating a partnership tax-filing requirement.

If two or more persons have a business relationship that, for tax purposes, constitutes a corporation or trust, obviously such an arrangement is not a partnership. However, a venture that is not a corporation or trust avoids partnership classification if the parties are merely sharing expenses. In addition, a married couple has the option of not filing a partnership tax return if they "materially participate as the only members of a jointly owned and operated business" and file a joint tax return.

Such an arrangement is known as a "qualified joint venture" and cannot be operated through a state-law entity. However, a husband and wife in a community property state may own and operate a business through a state law entity other than a corporation, such as an LLC, and elect to have that LLC disregarded for federal income tax purposes. The business entity must be owned as community property and have no other owners; if so, no partnership tax return is required. These rules are contained in Rev. Proc. 2002-69.

A final example of partnership-type arrangement that does not give rise to a partnership tax return requirement is co-ownership of real property, other than mineral property, but including rental property. Each co-owner must be a tenant-in-common, and title to the property as a whole may not be vested in a state-law entity. However, each tenant may own their interest in the property through an entity that is disregarded for tax purposes. A number of other requirements are set forth in Rev. Proc. 2002-22 which, if satisfied, will result in no partnership filing requirement.

In summary, a partnership can automatically arise for federal tax purposes even where no entity exists under local law. An arrangement of this kind includes a "syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on..." However, arrangements like those described above avoid partnership classification.