FIDUCIARY DUTY OF DIRECTORS AND OFFICERS

By: Andrew Burrows

The legal requirements for the duties of directors and officers of a corporation in Michigan are not well understood by business owners. This article explains these requirements, known as fiduciary duty, and briefly details common requirements of directors or officers of corporations.  There are similar rules that apply to members and managers of limited liability companies in Michigan.

It is important to note that under Michigan law, all fiduciary duties are applicable to both officers and directors of the corporation.

What is a “Fiduciary?”

                                                            

A corporate fiduciary is an individual who is employed as an officer of the corporation or has been elected by the shareholders as a director to hold and exercise power on behalf of the shareholders. Under Michigan law, officers and directors have a basic obligation to act only in the best interest of the shareholders.

What Duties Are Owed?

Although fiduciary duties stem from common law principles, they are found in Michigan’s corporation law, which is the Michigan Business Corporation Act. These duties include: 1) the duty of loyalty to shareholders to only act in their best interest; 2) the duty of care; and 3) the duty of good faith. Corporate fiduciaries are protected by the “Business Judgment Rule” in the absence of a breach of one of the above-mentioned duties in their day-to-day operation of the company.

The Business Judgment Rule

The fiduciary rules do not provide that a director or officer of a corporation will be liable for all bad decisions they make while serving the corporation, since this would produce an absurd result, making any risk-taking by officers or directors off limits. The solution to this is the Business Judgment Rule which states that when a corporation suffers a loss from a lawful transaction, a director or officer is not liable when he or she acted in good faith, on an informed basis, and under the honest belief that the action was taken in the best interest of the company.

Duty of Loyalty

The duty of loyalty is one of the most common fiduciary pitfalls for directors and is especially magnified in the case of a closely-held corporation where directors are often also shareholders. The duty of loyalty is most commonly breached when the director either: 1) engages in a transaction on behalf of the corporation that constitutes “self-dealing”; 2) engages in a transaction that constitutes self-interest; or 3) engages in a personal transaction that rightfully belongs to the corporation.

Self Dealing

Self-dealing occurs when a director has a financial interest in both sides of a transaction. An example of this would be having the corporation purchase another company that the director personally holds stock in. Self-dealing essentially creates automatic liability for the director unless his or her financial interest in the transaction is disclosed prior to its acceptance by the rest of the board of directors.

Self-Interest

A director engages in self-interest when he or she will receive a personal benefit from a transaction that is not equally shared by the shareholders. This is not the same as self-dealing. An example of self-interest would be a director obtaining a large bonus from the company every year the corporation is extremely profitable, but engaging in an extremely risky transaction to attempt to reach the profit goal. This is known as the “Enron Pattern”.

Corporate Opportunity

Under the Corporate Opportunity Doctrine, a director breaches his/her duty of loyalty when he or she personally seizes a business opportunity for personal gain, which the corporation could have taken. This includes any opportunity the director learns of from his/her position in the company or any opportunity to engage in a business in which the company is engaged or expects to engage. Again, disclosure is the solution to potential corporate opportunity issues.

Duty of Care

Generally, a director has a duty to keep him/herself informed of the activities of the corporation. The duty of care is not often included in a lawsuit against a director because a corporation may indemnify its directors for breach of the duty of care under Michigan corporate law.

Duty of Good Faith

Since the duty of care is often subject to indemnification, the duty of good faith has somewhat replaced it in lawsuits against directors. The duty of good faith may be breached either by objective or subjective bad faith. This means that an officer or director must either consciously disregard his or her responsibilities or act with an intent to harm the company or its shareholders.

Action Step:

In order to ensure you are meeting your duties as a director or officer, or as member of a limited liability company, you should ensure your business has a corporate/business attorney to advise you and make sure you understand your fiduciary duties in the context of your particular situation. In addition, you should consult with your insurance agent to make sure you have directors and officers liability coverage under your business general liability insurance policy.

DO I NEED A LICENSE TO WORK IN MY TRADE?

By: Ashley Prew

In Michigan, individuals and businesses engaged in residential building and residential improvement or maintenance work need to be mindful of the licensing requirements for specific trades.   

This article will provide a brief overview of some of the issues surrounding licensing requirements, including examples of some of the “less obvious” trades that require licensing in Michigan, the consequences of engaging in a trade without a proper license, and the steps to take to obtain the required license. 

Does My Trade Require a License?

In general, a person or business who contracts with a property owner to do residential construction or remodeling on a project with a total value is $600 or more (including material and labor) is required to be licensed as either a Residential Builder or a Maintenance & Alteration Contractor under Michigan law.  The definitions of a Residential Builder and a Maintenance & Alteration Contractor are very broad in terms of what falls under each license. The differences between the two types of licenses are as follows:

Residential Builder License

A residential building license is required to operate as what most people think of as the typical construction contractor.  A residential builder may build a new home or do any kind of repair work.  It is important to note that even if a residential builder contracts for the whole job, there are separate licensing requirements for certain specialty areas included in such work, such as plumbing, electrical, heating and cooling, and ventilation work.  If the residential builder contracts for the entire job, the builder may use licensed subcontractors for the other areas of work.

Maintenance and Alteration Contractor License

A maintenance and alteration contractor need only be licensed for a specific trade(s) and may only accept contracts for completion of services in which they are licensed.  This requirement exists whether or not the building being worked on is a new build or a remodel.  The definition of a maintenance and alteration contractor is very broad and generally includes any repairs and most improvements or changes to a residential structure.   Some of the unique types of activities that require licensing are:

·         painting and decorating;

·         siding;

·         gutters;

·         tile and marble;

·         swimming pools; and

·         laying wood floors. 

Please note that this list is not comprehensive.  If you are unsure whether your trade requires a license, please contact us.   

What Are the Consequences if I or My Business Engages in a Licensed Trade Without the Required License?

The consequences of failing to obtain the proper license are harsh. In fact, engaging in a licensed trade without a license is a criminal offense.  In the case of a first offense, failing to be licensed when necessary is a misdemeanor punishable by a fine of not less than $5,000.00 or more than $25,000.00, or imprisonment for not more than one year, or both. 

In addition, an unlicensed builder or maintenance and alteration contractor cannot collect monies if they are not paid by a customer.  Examples of collection measures afforded to licensed builders are the use of construction liens, foreclosure, and the potential to obtain money damages through a collection law suit.  If an unlicensed builder or contractor attempts to use these measures, the contractor and their business may not only be subject themselves to the criminal consequences above, but may also be liable for civil damages and restitution.

How Do I Obtain a License?

Generally, the licenses discussed above require at least sixty hours of approved education courses and that the contractor must take and pass a required examination for the specific type of license.  It is important to remember that each profession, trade, and business entity has different license requirements.  If you have questions regarding licensure requirements, whether your profession requires a license, or the steps you need to take to become licensed, please, do not hesitate to contact us directly regarding your specific situation.  

COTTAGE LEGACY PLANNING

By: Tim Williams

Introduction

The real estate industry indicates that cottage ownership in Michigan is at an all-time high.  Cottage owners enjoy many benefits of ownership. Cottages often appreciate at a faster rate than primary homes.  The owners also receive the enjoyment of a getaway where they can relax, unwind, and, perhaps most importantly, where they create a natural social gathering spot for children, grandchildren, extended family and friends.

Cottage legacy planning ensures that the cottage remains in the family for future generations. Proper planning for the cottage can help avoid negative tax consequences for the parents and their adult children and provide for the orderly transition of the cottage to the children.

A baseline tool of cottage legacy planning is that the parents need to convey the cottage to one of their trusts during their lifetime. This will keep the cottage out of probate and will allow for an orderly plan for the transition of the cottage to the children.

The Challenges

The key challenges in cottage legacy planning are:

1. Avoiding an increase in the property taxes when the cottage passes from the parents’ generation to the children.
2. Avoiding capital gains tax upon the appreciation that occurred during the parents’ ownership of the cottage.
3. Simply and effectively providing for the payment of the annual expenses and taxes incurred through cottage ownership.
4. Having a system in place that distributes use of the cottage among family members.
5. Avoiding the threat to ownership that would result from a divorce, death, or disability of a child, tax lien, or judgment against a child.

Alternative Structures for Maintaining the Cottage in the Family

There are two primary alternatives for maintaining the cottage as a legacy during the life of the parents and following the parents’ passing. They are: 1) a trust; or 2) a limited liability company. The principal factors involved in selecting which of these alternatives should hold the cottage for the duration of the parents’ lives and following the parents’ passing include:

1. Parents are able to impart their wishes for how the property is to be handled after death.
2. Flexibility in changing the use of the cottage and other terms of the trust following the parents’ passing.
3. Avoiding an increase in the property tax on the cottage due to events during the parents’ lives and following the parents’ deaths. This increase in property tax is often referred to as uncapping.
4. Limiting the liability of the parents, the children, and the entity selected to own the cottage.
5. The ultimate capital gain tax on the sale of the cottage.

Trust

Use of a trust can be employed to continue the ownership of the cottage within the family, manage the expenses, and dictate use of the cottage.

The transfer by the parents of the cottage to one of their trusts during their lives would not result in an increase in property taxes. This is permitted under new legislation in Michigan which came into effect on January 1, 2015.

The cottage would remain in one of the parents’ trusts following their passing. Upon the death of one of the children following the parents’ deaths, however, property taxes could increase.

The trust would provide for the contribution by the children of a pro rata share of the expenses, including maintenance and improvements, property taxes, insurance and utilities. If a child did not share in the burden of the expenses, after a period of non-contribution, that child’s interest in the trust would forfeit. This is intended to be a strong incentive to encourage contribution as opposed to causing forfeiture. Another alternative would be for the parents to leave a portion of their assets to provide for the payment of the annual expenses of the cottage.

A use agreement is necessary, either within the trust or as a separate document.

The trust would also maintain a policy of life insurance to buy out a deceased child’s interest in the cottage.

There are certain disadvantages to using a trust in legacy planning for a cottage. The primary disadvantage is that trusts offer little capacity for flexibility following the death of the parents. The children would be unable to alter the terms of the trust following the parents’ deaths, although this may be desirable in certain situations. A limited liability company would provide for greater flexibility in this regard. Another disadvantage is that a trust offers no shield against liability.

Limited Liability Company

Use of a limited liability company is the other alternative to continue the ownership of the cottage within the family and manage expenses and use. The mechanics of this include the creation of a “springing” limited liability company during the parents’ lives. The limited liability company would spring to life upon the death of the second parent --. At that time, the cottage would be conveyed to the limited liability company out of whichever of the parents’ trusts owns the cottage. It is believed that this will not result in an increase in the property taxes.

The children would enter into an agreement that provides for the remaining children to purchase the interest of the Cottage upon the death, divorce, bankruptcy, etc. of one of the children.

The agreement would provide that the limited liability company would maintain a policy of life insurance to buy out a deceased child’s interest in the cottage.

The agreement would also provide for the contribution by the children of a pro rata share of the annual expenses, including maintenance and improvements, property taxes, insurance, and utilities. If a child did not share in the burden of the expenses, that child’s interest would forfeit. Again, this is intended to encourage contribution as opposed to causing forfeiture.

The death of a child following the deaths of the parents can result in an increase in the property taxes. Michigan’s rules provide that when more than 50% of the ownership in limited liability company changes, the property taxes will “uncap”.

ACTION STEP:

If you are a cottage owner or the child of a cottage owner, it makes sense to explore the alternatives available for passing the cottage to the next generation. Planning now is critical to avoid undesirable tax consequences and to provide for the orderly ownership, payment of expenses, and use of the cottage in the future.

THE IMPORTANCE OF ESTATE PLANNING IN BLENDED FAMILIES

By: Adrienne Knack

There are many reasons for placing your affairs in order. Some of the most important reasons include reduction of liability for estate tax, probate court avoidance, leaving a legacy for your family, and ease of administration. A very common situation we assist clients with is estate planning for a blended family.  Long gone are the days of The Nelsons, as blended families are much more common in today’s world.  Whether it’s due to a death or divorce, there are many reasons a blended family needs to have the proper documents in place.

There are many different types of blended families.  We often see families that consist of two spouses that each bring children into the second or subsequent marriage.  There are also families where one spouse has kids from a prior marriage and the other spouse does not have children.  Sometimes, that couple wants to have children together as well, or both spouses bring children into the marriage and then have a child together.  Furthermore, there are families that have both adult children and minor children.  Whatever the family dynamic, there are serious issues that need to be addressed.  It is preferable to resolve these issues before they become a crisis – say, before someone passes away or becomes incapacitated.  Failure to properly address these issues will result in a legal mess for a surviving spouse (and children).One very important question in blended families is what will happen to minor children.  A guardian and conservator needs to be named.  Often, there is another parent that needs to be taken into consideration.  Does the other parent share custody?  If so, it is unlikely that their ex-spouse can (or wants to) leave the children with anyone else.  If the other parent does not share custody, it is significantly easier to dictate that the minor children will stay with their step-parent (and usually their other siblings and/or step-siblings). 

Another important issue that needs to be addressed is how assets will be divided and distributed to children in a blended family.  Do assets get divided equally between all children of both spouses?   Do the children the couple had together get more than the other children?  Often, specific language is necessary to inhibit the surviving spouse from disinheriting  step-children.  Many things need to be taken into consideration here, including whether or not the children will receive anything from their other parent or their other parent’s trust or estate.  Perhaps there is one child (or more) that is estranged from the parent and who the parent may want to disinherit.  Some families wish for each parent’s individual assets to go to their own children only.  There are many moving parts and many issues at play.  The language addressing these issues needs to be very specific and is highly specialized on a case-by-case basis. 

Another complicated question is who will handle the administration of the parents’ affairs (wills, trusts, powers of attorney) after their death.  Some blended families appoint an adult child of each spouse to serve in a co-capacity. Preferably, these step siblings have a good head on their shoulders and are looked up to by the other children.  Some families want each parent’s own child to handle their own affairs and not their spouse’s.  Or, perhaps, the parents do not want to put any of their children in the position to be the fiduciary so as to avoid potential conflict with their siblings or step-siblings.  In that case, a non-child fiduciary makes the most sense.  Every family is different and these issues can be addressed by consulting with an experienced estate planning attorney and having the proper estate planning documents in place.

Action Step:

Failure to address these (and other) blended family questions can result in severe consequences.  If probate is needed, it will be guaranteed to be a long, expensive, and tedious process through the court system.  It also opens the door for fighting within the family, which can lead to hard feelings, family estrangement, and a parent’s assets going to children and stepchildren they did not intend.

Proactively addressing these issues will help eliminate some of the tension that can arise in blended families upon a death of one of the parents.