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Archive for December, 2013

Limitations of Limited Liability – Piercing the LLC Veil

Posted on: December 10th, 2013 by Debra Rahmin Silberstein

The common law doctrine of “piercing the corporate veil” is an equitable remedy, which allows the courts to disregard the corporate form, and access the assets of a corporation’s shareholders where such a remedy is required to prevent fraud or injustice. Although the issue is not well settled (due to the LLC’s relative immaturity as an entity), it is likely that courts would apply the veil piercing doctrine equally to the members or managers of a single member LLCs in Massachusetts. The Supreme Judicial Court has ratified a 12 factor test, used by the trial courts, to determine whether the corporate or LLC veil should be pierced:

(1) common ownership; (2) pervasive control; (3) confused intermingling of business assets; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporate funds by dominant shareholder; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; and (12) use of the corporation in promoting fraud.

Observation of corporate formalities is a less significant factor when dealing with LLCs, because the LLC statute gives the entity the flexibility to keep processes informal. However, where a written operating agreement has been adopted, members should be careful to conform business practices to the terms of the agreement.

Further, because owners of single member LLCs, by definition, exercise pervasive control over their businesses, to preserve the liability protection function of their LLC, such owners should be particularly careful to avoid the commingling of their assets with those of the LLC, and should keep meticulous records of transactions and activities conducted by the LLC. Further, such business owners should avoid using the LLC’s assets, accounts, or credit cards for personal transactions, and should be clear to tenants, vendors, and other third parties that they are dealing with the LLC as an entity, and not the owner in his or her individual capacity.

Additionally, members should not take distributions that would leave the LLC undercapitalized and therefore lacking assets to pay potential creditors. The absence or insufficiency of liability insurance may contribute to a determination of undercapitalization, but does not itself constitute undercapitalization.

SJC Confirms Mass Trustees Have Decanting Power

Posted on: December 10th, 2013 by Debra Rahmin Silberstein

In Morse v. Kraft¸ the Massachusetts Supreme Judicial Court held that Richard Morse, the sole trustee of the Kraft Family Irrevocable Trust (the “1982 Trust”), had the power to transfer, or “decant”, the assets of one irrevocable trust to another.

The 1982 Trust created separate sub-trusts for each of the settlor’s children, and each child was an income beneficiary of such sub-trusts. However, despite the fact that Morse believed the children were capable of managing the management and distribution of the funds held in their respective sub-trusts, the terms of the 1982 Trust forbade any interested beneficiary from exercising control over distributions.

Believing it to be in the beneficiary’s best interest, Morse wanted to transfer the assets of each sub-trust to a new 2012 Trust, retaining the same beneficiaries, but allowing each child to manage and distribute their own trust assets. Because the power to decant was not explicitly authorized in the 1982 Trust, Morse sought the Court’s interpretation of the Trust to determine whether it included the power to decant.

Although the Court noted granting the decanting powers would essentially allow the Trustee to “amend an unamendable Trust,” the SJC held that the decanting power was inherent in the terms of the 1982 Trust. Citing the Trust’s broad, discretionary language, which limited the Trustee’s power only in that his distributions must be “for the benefit of” the beneficiaries, and affidavits from the settlor and the drafting attorney, which stated that it was the settlor’s intent to give the Trustee decanting power, the Court held that the terms of the 1982 Trust authorized distributions to new sub-trusts.

The Court declined, however, to adopt the proposal of the Boston Bar Association, which, in an amicus brief, encouraged the court to recognize an inherent default power of trustees of irrevocable trusts to distribute property in further trust unless otherwise restricted by the terms of the Trust. Citing a recent trend of state legislatures to adopt trust decanting statutes, the Court reserved for the legislature the judgment of whether to recognize such a default power.

Further, the Court explicitly put drafting attorneys on notice that if a future settlor intends to give a Trustee decanting power, it is expected that the power will be explicitly granted by the Trust. Although the Court declined to answer the question of whether omitting the decanting power suggests intent to preclude decanting, it stated that “in light of the increased awareness, and indeed practice, of decanting, we expect that settlors in the future who wish to give trustees a decanting power will do so expressly.”

Estate Planning Implications

Therefore, trust settlors who wish to give trustees the flexibility – consistent with their fiduciary obligations – to decant trust assets into further trusts, should ensure that their trust instrument explicitly grants the trustee such powers.

Likewise, grantors who may be wary of Trustees altering the terms of a trust by decanting trust assets into further trusts without specific limitations on distributions or investments, for example, may wish to explicitly preclude the Trustee from decanting.

Revocable trusts may be amended at any time during the grantor’s life to accomplish the above changes, and under the Massachusetts Uniform Trust Code (“MUTC”), unless a trust expressly states that it is irrevocable it is interpreted as being revocable.

The MUTC also provides flexibility for the trustees of irrevocable trusts. Unless otherwise provided in the terms of the trust, irrevocable non-charitable trusts may be amended upon the consent of all beneficiaries and the settlor, with the approval of the court. As such, should a court construe the terms of an irrevocable trust to preclude decanting powers, the beneficiaries and the settlor may be able to modify the terms of the trust, provided that they all agree. Further, if the settlor does not consent, the beneficiaries may be able to modify the terms of the trust if the court concludes that modification is not inconsistent with a material purpose of the trust.

Such an option may have been available to Morse, had the SJC decided that the 1986 Trust precluded the decanting of trust assets, however there were potential triggers to the generation-skipping transfer tax (“GST”).

MassHealth Cracks Down on Care Agreement Rates

Posted on: December 10th, 2013 by Debra Rahmin Silberstein

Family members using a care agreement for medicaid planning should check that the hour- ly rate they’re receiving accurately reflects the fair market value of the services they’re providing.Screen Shot 2013-12-09 at 8.09.21 PM
While, in certain instances, MassHealth pre- viously allowed applicants to pay relatives between $20 and $25 per hour for proving care services, in recent Fair Hearing Decisions the Agency has taken a hard line approach towards caregiver relatives. In doing so, MassHealth has focused on the fair market value of the services received by the applicant. Although applicants cited personal care rates of around $25 per hour in the private sector as justification for paying their relatives a similar rate, MassHealth argued that private sector providers receive special training, and have administrative and overhead costs which make their rates irrelevant in determining the market value of care rendered by relatives.
Instead, the Agency proposed that the MassHealth Personal Care Attendant (“PCA”) rate (currently $12.98 per hour) be applied in circumtances where family members provide comparable care services for Mass- Health applicants. Consequently, those who pay relatives more than the PCA rate risk a period of ineligibility determined by the difference in the amount transferred and the amount that would have been transferred if the relative had been paid at the PCA rate. Currently, MassHealth will allow caregivers who receive higher rates of pay to “cure” the ineligibility period by transferring the difference back to the applicant. However, if the caregiver does not have sufficient assets to cure the transfer, an ineligibility period, and the cost of private pay long-term-care during that period are likely.

In one recent instance, a MassHealth applicant was successful in charging a higher rate where her caregivers provided exceptional levels of service, in excess of the level of care provided by MassHealth Personal Care Attendants. For example, relatives frequently spent the night with the MassHealth applicant, a service not provided by a PCA. In that case, the hearing officer found that the caregiver relative was justified in charging a higher rate: $17.50 per hour. Significantly, the case also indicated that there was some inherent value in having care provided by a family member whom the applicant trusts, and who is particularly attuned to the applicant’s needs. However, while individual cases are instructive as to how particular arrangements may be viewed, administrative decisions are not binding on the Agency, and MassHealth will determine a proper rate based on the facts and circumstances of each individual applicant.

Given the uncertainty involved in predicting MassHealth’s position in any particular case, future MassHealth applicants and their caregivers should evaluate their hourly rate and determine, based on the types and scope of services provided, whether a rate higher than the PCA rate is justified. Further, if it is determined that a higher rate is justified, the funds transferred in excess of the PCA rate should be put aside by the caregiver in case a “curing” transfer back to the applicant is necessary to avoid a period of ineligibilty.

Finally, MassHealth applicants should be aware that, to avoid disqualifying transfers, care must be taken to follow the formalities of a typical, arms-length transaction be- tween unrelated parties. Caregivers who do not provide contemporaneous records of hours worked and activities performed, for example, may have their their pay un- der the care agreement characterized as a disqualifying transfer.