If a tenant files for bankruptcy, an automatic stay goes into effect. The automatic stay immediately prohibits a landlord from taking any action against the tenant or its property. The landlord cannot send default notices, file or continue an eviction action, collect a judgment against the tenant, demand the payment of delinquent rent or other amounts, or terminate the lease (even if the lease provides that the landlord may terminate if the tenant files bankruptcy) without first obtaining relief from the bankruptcy court.

If a landlord violates the automatic stay, the landlord can face damages for such a violation. The tenant may seek actual damages, punitive damages, attorney’s fees and costs. Further, the landlord can face consequences for contempt (violating a court order) because the automatic stay is a court order. The sanctions a court can order for contempt include fines, attorney’s fees and damages.

Despite the automatic stay, the tenant must pay rent first coming due after the bankruptcy filing, but the landlord must be prepared to enforce this right in the bankruptcy court. Bankruptcy Code Section 365(d) requires debtors to perform all commercial lease obligations until the lease is assumed or rejected. If the tenant fails to pay rent or other amounts first coming due after the bankruptcy filing and thereafter, the landlord can move for the bankruptcy court to compel payment.

The tenant has three options for dealing with the lease in the bankruptcy case.

One option is to assume the the lease. If the tenant elects to assume the lease, it must cure all defaults under the lease and the lease will otherwise continue in accordance with its terms.

A second option is to assume and assign the lease to a third party. This is likely to happen if the tenant is selling its business as part of the bankruptcy. If the tenant elects to assume and assign the lease, the tenant must cure all defaults, and the assignee must demonstrate the ability to perform all future obligations under the lease.  Generally, the tenant may assign the lease regardless of any assignment prohibitions in the lease or requirement for landlord’s consent.  If the lease is assigned, the tenant will be relieved of all future obligations under the lease, and the assignee will be the new tenant under the lease.

The third option is to reject the lease. If the lease is rejected, all obligations of the tenant will cease, the landlord may retake the space, and the landlord may file a claim for damages just like any other creditor.

If a tenant files bankruptcy, it does not render a landlord helpless.  Instead, the landlord must work within the framework of the bankruptcy laws in exercising its rights and remedies.  Since bankrupt tenants are often permitted to disregard valid lease provisions absent an objection from the landlord, landlords should consult with experienced counsel to ensure their rights are enforced in the bankruptcy case.

High-income taxpayers need to be aware of the Net Investment Income Tax (NIIT).  The NIIT is a tax passed in 2010 to help pay for the Affordable Care Act, a.k.a. ObamaCare.  Below is a summary of the NIIT, and a few planning opportunities to consider to avoid/minimize NIIT.

The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above certain thresholds.  The NIIT went into effect for tax years beginning on or after January 1, 2013.

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000

 

At this time, the threshold amounts are not indexed for inflation.

In general, estates and trusts are subject to the NIIT if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins (for tax year 2014, this threshold amount is $12,150).

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (meaning the taxpayer does not “materially participate” in the business).  To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income. 

To the extent that gains are not otherwise offset by capital losses, the following gains are examples of items taken into account in computing Net Investment Income: (i) gains from the sale of stocks, bonds, and mutual funds; (ii) capital gain distributions from mutual funds; (iii) gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence); and (iv) gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner). 

The NIIT does not apply to any amount of gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes.

In order to arrive at Net Investment Income, Gross Investment Income (items described in items 7-11 above) is reduced by deductions that are properly allocable to items of Gross Investment Income.  Examples of deductions, a portion of which may be properly allocable to Gross Investment Income, include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.

Some planning opportunities to consider to help avoid/minimize the NIIT include: (i) receiving the purchase price from a sale of your closely held business or real estate over more than one year; (ii) generating losses to offset gains; (iii) renting property to your business; (iv) lending money to your business; and (v) take an active role in your closely held business.

Preparing the appropriate estate plan for an individual requires the legal skills of an attorney to put together the right documents in the right combination.  At a minimum, the following estate planning documents are recommended by most attorneys:

Last Will and Testament.  A Last Will and Testament is a legal declaration that directs the distribution of probate assets upon the death of an individual (“testator”).  Probate assets are assets held in an individual’s name at the time of his or her death that do not otherwise transfer by contract (e.g., transfer on death designations, joint and survivorship, etc.).

Probate assets are subject to the oversight of Probate Court and administered in the County in which the decedent resided at the time of death.

The Last Will and Testament includes a provision for the designation of the personal representative (Executor) of the testator’s choosing, to be appointed by Probate Court.

Without a Last Will and Testament, the property passes in accordance with the Ohio Statutes of Descent and Distribution.

Durable Power of Attorney.  A durable Power of Attorney is an instrument by which one person (the principal) appoints another person (the attorney-in-fact) as an agent authorized to perform specific or general acts for the principal.  This financial power of attorney can be a very simple document, but one that gives significant powers to the attorney-in-fact.  This estate planning tool is capable of facilitating the management of an individual’s affairs during incompetence.

 Durable Power of Attorney for Health Care.  Ohio law permits an individual to execute a Durable Power of Attorney for Health Care.  With this document, an individual can designate a person to make health care decisions if the individual is unable to make such decisions on his or her own behalf.

The individual signing the Durable Power of Attorney for Health Care must be of sound mind.  The decision maker may not be the attending physician or the administrator of any health institution involved in the patient’s care.

Generally, the person appointed in the Durable Power of Attorney for Health Care will have the authority to give informed consent, refuse to give informed consent, and to withdraw consent for any medical treatment.  However, the person holding the Power of Attorney will not be able to refuse or withdraw consent to health care needed to maintain life, except in very limited circumstances.

Living Will.  A Living Will is a document that provides a means for an individual to declare his or her intentions regarding the withholding or withdrawal of life-sustaining treatment, including CPR, when he or she is no longer competent to make an informed medical decision and is in a terminal condition or a permanently unconscious state.

Ohio’s Living Will law distinguishes between patients who are terminally ill and those who are permanently unconscious.  Although both conditions must be verified by two (2) doctors, in Ohio there are additional protective measures for the permanently unconscious.  Food and water may not be withheld from a permanently unconscious individual unless the patient has signed a Living Will with a special section in capital letters, which special section must be signed or initialed.

Under no circumstances may an individual be denied comfort care.  Comfort care is defined as the minimum amount of care administered to alleviate pain and suffering, but not to prolong life.

Last Will and Testament. A Last Will and Testament directs the distribution of probate assets upon the death of an individual (“testator”).  Probate assets are assets held in an individual’s name at the time of his or her death that do not otherwise transfer by contract (e.g., transfer on death designations, joint and survivorship, etc.).

Probate assets are subject to the oversight of Probate Court and administered in the County in which the decedent resided at the time of death.

The Last Will and Testament includes a provision for the designation of the personal representative (Executor) of the testator’s choosing, to be appointed by Probate Court.

Trust.  A Trust is a legal relationship whereby property is held by one party for the benefit of another.  There are two (2) basic categories of written Trusts; Living Trusts (Inter Vivos Trusts) and Testamentary Trusts.

The primary difference between a Testamentary Trust and a Living Trust in Ohio is that the Testamentary Trust is under the supervision of the Probate Court from the appointment of the Trustee to final distribution.  In connection with a Living Trust, the Trustee administers the Trust without the involvement of the Probate Court, except under certain special circumstances.  An advantage of a Living Trust is that the Trust, Trust assets, and distributions are not of public record.

Living Trusts are revocable or irrevocable, and are set up during the lifetime of the Grantor.  Trusts are also very useful for setting up funds for the benefit of someone who is handicapped or incompetent.  They are frequently used by parents and siblings for a “special” family member.  Trusts can also be used in Medicaid planning.

Living Trusts are often used in moderate and large estates to assist management and to avoid incurring Executor fees and reduce attorney fees at death.

Testamentary Trusts are established in the Grantor’s Last Will and Testament, and are funded, if ever, after the death of the testator.  A Testamentary Trust may never be funded because the testator may make funding contingent upon certain circumstances; for example, the Last Will and Testament may state that the Executor funds the Trust only if the testator and the testator’s spouse both die while their children are minors.

Ohio law gives Probate Court the exclusive power to direct and control the conduct of the Testamentary Trustee.   The Testamentary Trustee is required to prepare and file with Probate Court, an account of the Trustee’s administration of the Trust at least once in each two (2) years, or at any other time upon order of the Probate Court.  The account must include an itemized statement of all receipts of the Testamentary Trustee, and of all disbursements and distributions made by the Testamentary Trustee during the accounting period

An important component of almost any estate planning is a general durable Power of Attorney for financial matters.  Such a Power of Attorney allows the person granting the power (the “Principal”) to designate an attorney-in-fact to perform specific duties as enumerated in the document.  Unless a Limited Power of Attorney is being granted, the attorney-in-fact is typically granted full power, authority and discretion to do all things required or permitted to be done in carrying out the purposes for which the Power of Attorney is granted as fully as the Principal could do if personally present.

Typically, some of the specific powers granted to the attorney-in-fact include, but are not limited to, the authority to sell, exchange, lease and otherwise dispose of the Principal’s property, to execute and deliver deeds, leases, assignments and other instruments, to sign and perform contracts and written instruments, to endorse and receive payment for checks payable to the Principal, to sign and deliver checks on accounts of the Principal, to withdraw from and deposit to the Principal’s accounts, and to add property to a revocable trust that has been created or may be created by the Principal.

As an attorney-in-fact is granted broad powers to act on behalf of the Principal, it is imperative that the attorney-in-fact understands that he or she is acting as the agent of the Principal in a “fiduciary” capacity.  A fiduciary must act in the highest good faith for the Principal’s benefit.

The attorney-in-fact must follow the instructions set out in the Power of Attorney, must use ordinary care and diligence in everything he or she does on the Principal’s behalf, and can only do the things the Principal has empowered him or her to do.  The attorney-in-fact is held to a high standard of care when acting for the Principal.  Therefore, any transaction that may be suspect, if viewed by a third party, should be avoided, which would include checks written to the attorney-in-fact and signed by the attorney-in-fact, or even signed by the Principal.  The attorney-in-fact should not do anything that does not benefit the Principal.

If you are interested in talking to our Estate Planning team regarding a Power of Attorney or any other estate planning matters, please don’t hesitate to contact us.  We look forward to making a difference for you and your family.

 

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Kevin J. Hopper is an experienced estate planning attorney whose practice has been in Anderson Township.   He has been in practice since 1978.

In August, he joined his practice with the Finney Law Firm, LLC, and brought with him his experienced paralegal, Tammy C. Wilson and their many satisfied clients.

They join attorney Isaac T. Heinz in providing advanced and sophisticated services in the areas of will, trusts, estate planning, and estate administration, and the tax and succession planning advice that comes with that practice area.  They provide these services for individuals with both large and small estates.

Please ask us how these experienced professionals can “make a difference” in planning for your future.

Unless a couple has assets in excess of five million dollars, estate taxes are no longer a concern for Ohio residents.  This is because Ohio has done away with its estate tax, and the Federal estate tax exemption is now over five million dollars.  For such couples, the new estate “tax” planning is income tax planning.  The income tax planning includes allocating assets between the couple to take advantage of the step up of basis on each of the individuals passing in order to minimize any capital gains taxes due.