Legal Advisory

IDEAS AND STRATEGIES FOR YOU AND YOUR BUSINESS
THIRD QUARTER 2001

REVOCABLE TRUSTS KEEP YOU IN THE DRIVER'S SEAT

Whenever a person is incapacitated or dies owning valuable property (real or personal), the law looks to provide a caretaker for that property. If the person has not named a caretaker, the law steps in to do so. If, on the other hand, the person has a trust or will, the state will step back and allow the person's own choice of caretaker to govern.

While most people know that a will can be used to select a caretaker for their property after their death, fewer people are aware that a trust can provide a choice of caretaker for their property while they're alive. That caretaker-called a trustee can even be themselves or a trusted professional. All that is needed to create a trust is a person with property and a trustee for that property.

How it works: There are two basic types of trust-revocable and irrevocable. The irrevocable type, as the name suggests, cannot be canceled. Once you transfer property to an irrevocable trust, you lose control over it. For that reason, there are tax advantages to be gained with an irrevocable trust because, as far as the tax law is concerned, you no longer own the property even though someone close to you may control it following your instructions.

The revocable trust, sometimes called a "living trust," is a different sort of creature. You can put valuable property in a living trust and still maintain control over it as trustee. Most important, the trust document provides for a successor trustee who will assume control of the property. The advantage: if you are incapacitated, your family does not have to apply for a conservator or guardian to be appointed.

The successor trustee simply takes over. The same is true after you die. The successor trustee simply carries on without missing a beat-no administrators or executors are needed. Your property stays out of probate.

Living trusts are quite versatile because they can be changed at any time. This versatility does result in the loss of tax advantages that an irrevocable trust can provide. And a revocable trust does not shield assets from creditors as an irrevocable trust does. But these shortcomings are counterbalanced by the increased control provided by a revocable trust. You can direct that property be transferred into and out of the trust as your needs dictate. Successor trustees and the powers of the trustee can be amended "on the fly." Trusts are sophisticated legal documents and they should be prepared only by professionals. Together with a will that simply leaves everything to the trust-called a "pour-over" will-they can provide a complete estate-planning package.

PRENUPTIAL AGREEMENTS: MARITAL EQUIVALENT OF A WILL

With many marriages now ending in divorce, "'til death do us part" often is little more than a romantic ideal. That has propelled the prenuptial agreement to a place of prominence among common legal documents. Just as a will substitutes your decisions for those of the probate court, the prenuptial agreement assures that your marital estate will be divided according to your wishes, rather than the judgment of a divorce court. Years ago, few people other than multimillionaires used prenuptial agreements. Today, there is no good reason why anyone preparing for marriage should be without one, especially if your family runs its own business. It doesn't matter if you have only a small interest in the family business; in the event of a divorce, it could still cause big headaches when your spouse's attorney probes its internal workings.

How enforceable is a prenuptial agreement, especially when it looks unfair to one spouse? These agreements are now commonly enforced in every state as long as they are shown to be valid contracts between two completely informed adults. All the formalities associated with signing a will should be employed. In some cases, particularly when there is a great disparity of wealth between the parties, it may be wise to videotape the signing.

The prenuptial agreement should completely disclose all assets of the spouses-to-be and describe exactly how these and later-acquired assets will be divided in case of divorce. The Uniform Premarital Agreement Act, adopted in 18 states, allows the parties wide latitude in choosing how far-reaching the agreement will be. The only limits are that a spouse cannot be left so impoverished that he or she becomes eligible for public assistance and the rights of children to support cannot be adversely affected.

While courts usually enforce prenuptial agreements, there are exceptions. These exceptions include cases in which:

• the agreement was not signed voluntarily;
• the agreement was unconscionable when it was signed; or
• one party was not provided with a fair and reasonable disclosure of the property of the other, did not waive disclosure and could not reasonably have had independent knowledge of the other's property.

Outside of these situations, the agreement generally will be upheld. So a prenuptial agreement provides a real opportunity for both parties to predetermine the financial result of a divorce. The agreement allows the parties to know going into a marriage what the risks are to their family wealth if the marriage is dissolved. It's an opportunity to control your future destiny instead of gambling on divorce court.

HOW TO DEAL WITH A NOISY NEIGHBOR

Every neighborhood has them-the young neighbor who stays up all hours of the night playing his stereo at aggravating volumes and the nice older gentleman who thinks it's OK to mow his lawn at 7:00 o'clock on Saturday morning. In both cases, the neighbor's noise interferes with your ability to sleep and that can soon interfere with your sanity.

Before you call the police and complain, take a drive to your local library or town hall and consult your municipal noise ordinance. The ordinance will give hours during which relative quiet is mandated. It may even list allowable decibel readings. For example, it's not unusual for an ordinance to prohibit a sound of greater than 85 decibels at your property line between 10:00 p.m. and 7:00 a.m.

If your town has a noise ordinance and you feel your neighbor is violating it, the first thing to do may be the hardest thing. Talk to your neighbor. Bring a copy of the ordinance with you and explain your problem. It's a good idea to bring another, similarly perturbed, neighbor with you. You may be surprised to find out that your neighbor has no clue that his noise was bothering anyone. Faced with your calm and friendly tone of voice, the noisy neighbor may mend his ways. If there is no improvement after your chat, it's time to call the authorities.

WHEN TO GET IT IN WRITING

Contracts can be a pain. They demand that we think through a transaction and anticipate and plan for everything that could go wrong. When you're buying a house, you don't mind going through the process because there's a lot of money at stake. But you wouldn't want to go through all the work of drafting a contract if you were buying, say, a pack of gum. Not that nothing could go wrong with the purchase of the gum, but the price of the gum does not justify the contract. Somewhere between these two transactions falls the line between written and unwritten contracts. Let's see where it should be.

You may not think much of it when you call a plumber to fix a leaky shower, but you enter into an implied agreement as soon as you call him. He agrees to pay the costs of coming to your house, to apply his expertise to diagnose the problem and to bear the cost of any tools he may need to do the job. You agree to pay for any parts he may need and to pay for his time. All these agreements are usually made without a written contract. Usually, the transaction is problem-free.

But take the case in which the problem recurs nine months after the plumber's visit. Does your implied agreement with the plumber include a warranty? Are you entitled to have the plumber come again at no cost for his services? Who pays for the parts? What if the problem recurs two years later? These are questions that most likely are not addressed by your implied agreement. Yet you don't think it fair to have to pay the plumber again to fix the same problem.

If you were to take the matter to court, the plumber would be held to the standards for plumbers in your community. If three-year warranties were the norm, you would get that. Conversely, if no warranty were the norm, you would be stuck with that.

When you start talking about going to court, that written contract suddenly begins to look fairly worthwhile. If you had a written warranty agreement from the plumber, you most likely would not have a dispute. A one-year warranty requiring the plumber to provide free services and requiring you to pay for parts would have solved the problem of the nine-month recurrence.

The lesson: If a transaction could end up in court, the agreement should be in writing. It doesn't matter which side of the transaction you're on-a written contract benefits the plumber as much as the homeowner. If you own your own business, written contracts should be a way of life. They make the parties think through the transaction and provide for remedies if something goes wrong. That can save thousands of dollars in court costs later on.

WATCH WHAT YOU SAY ONLINE

There was a time when the average person didn't have to worry about libel. Unless you were quoted in a newspaper or on television, there was little chance that you could face a libel suit. That was before the Internet. Today, every time you enter an online chat room, even under a fictitious name, you run the risk of a libel lawsuit if you make a false statement about someone.

Libel primer: Libel is a false writing communicated to someone that harms a third person's reputation. Ten years ago, if you wrote a note to someone in which you complained about a bad experience with a product and you exaggerated just a bit to make your point-say, you falsely alleged that the product injured you-it was unlikely there would be repercussions from the manufacturer. Today, if you go online and complain about a product and then exaggerate a bit, you are much more likely to hear from the manufacturer's attorneys.

If you think that hiding behind user names or pseudonyms will protect you, think again. Lawyers for libel plaintiffs have now gotten sophisticated enough to know how to subpoena the records of your Internet service provider and can quickly find the account owner of any user name or pseudonym. From there, it's a simple matter of taking depositions from the account owner and all the people whom the account owner says had access to the account.

Of course, using pseudonyms when making potentially libelous statements is not a new phenomenon. Benjamin Franklin was doing it more than 225 years ago. Then and now, if the person libeled can determine the writer of the libel, there are bound to be consequences.

Take the recent case involving the Calloway Gold Company, maker of the Big Bertha golf club. Someone using different pseudonyms began making negative comments on the Internet about the design of Calloway's clubs. The Calloway lawyers discovered that the source of many of these negative comments was an owner of a competing company. Rather than going to trial against the offending competitor, Calloway demanded a more Internet-savvy relief: it required the competitor to make a formal written apology on a popular web site.

The moral: You need to watch what you say on the Internet as much as you would if you were being interviewed by CBS or The Washington Post. Whereas once it was difficult to commit libel without access to a printing press or broadcasting outlet, now anyone with a computer can do it.

BRIEFS

• State of Ergonomics-In February, Congress repealed the new ergonomics standards approved by President Clinton in his administration's final days. The standards proposed by the Occupational Safety and Health Administration (OSHA), were designed to reduce the incidence and severity of musculoskeletal disorders in the workplace. But nearly two-dozen states with their own workplace safety programs must consider moving forward with their own standards, so the debate continues.
• Bankruptcy Legislation-For those who might need to file for bankruptcy, it may make sense to act now. The House and Senate have approved versions of a bill to rewrite bankruptcy laws. Both versions would curb the ability of many debtors entering bankruptcy to wipe out credit card debts and other unsecured loans. President Bush has indicated he would sign the bill, which would then become law after 180 days.
• Workers' Comp-Some workers' compensation carriers may deny legitimate claims. Common reasons for denial include the carrier's belief that there hasn't been an injury or that the injury is not serious enough to qualify for temporary or total disability. If legitimate benefits are denied, an attorney may be needed.
• Extending Credit-Many businesses rely on credit cards to avoid the risk of extending credit to customers. However, if you operate the kind of business in which extending credit is necessary, you must comply with federal laws affecting credit sales to consumers. Some states are also beginning to adopt consumer credit laws that mirror many provisions of federal law. An attorney can assist in reviewing your responsibilities.

Legal Advisory is published for our clients, friends and professional associates. It is designed to provide accurate and authoritative information with respect to the subject covered. The information contained in this newsletter is intended to be general in nature. In addition, state law may have an impact on specific situations. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. © 2001 Legal Advisory

TIME TO REVIEW YOUR WILL?

When the new tax act was passed earlier this year, the first thing you might have thought of was how you were going to spend your tax refund. The next thing you should have thought of was your will.

Why your will? Because wills are taxed according to the tax law in effect when you die. The only way to ensure that distribution of your assets will be done in the way that will produce the smallest tax bites is to ensure that your will takes into account the latest tax laws.

Many people seem to forget about their will once it has been drafted. Most legal professionals, however, recommend that you have a "will checkup" at least once every five years. What kind of events can cause a will to need amending? In addition to the recent changes in the tax law, here's a list of other common reasons why a review of your will is in order:

• The birth of a child.
• The death of a beneficiary
• The death of a trustee or executor.
• Your marriage or the marriage of a beneficiary.
• Your divorce or the divorce of a beneficiary.
• You inherit substantial money or property.
• You accumulate additional substantial real or personal property,
• You have a falling out with a beneficiary, trustee or executor.

Wills, unlike other legal documents, have no effect until you die. You can revise your will as often as you wish while you are still alive and competent to do so.

But you do not have to revise your entire will every time you wish to make a minor change. Instead, your lawyer can draft an amendment to the will known as a codicil. A codicil is executed with witnesses, but it is a much smaller document that can be prepared and executed quickly. If numerous changes accumulate over time, however, a completely new will should be executed.

You may want to use the five-year "checkup" as the time to incorporate the codicils into a new will, or ask your lawyer to advise you when a new will seems necessary.

THE RIGHT WAY TO FIRE AN EMPLOYEE

Time was when the boss had the power of a dictator. "It's my way or the highway," many of them said. Well, times have changed. Now, an employee shown the door may come back knocking with his lawyer. There's a right way and a wrong way to fire an employee. Doing it the right way may save you a substantial amount of money and aggravation.

The guiding principle of effective termination is that it should never be a surprise for the employee. By the time the day comes for the employee to go, he or she should not only have seen the writing on the wall, but should have prepared both mentally and financially for it. In the best case, the employee will find another job before the final day comes.

The way to reach this result is to communicate with the employee. If there is a serious problem with the employee's performance, don't wait for it to improve; talk to him or her right away. If the employee denies that there is a problem then you can counter with, "Well if there's no problem, then I'll expect your work to return to its former quality. Let's meet again in a few weeks to be sure that we're back on track."

Then, you need to follow up with the employee and if the work has not improved, you need to set a deadline for improvement. At that point, the employee will either improve his or her work (Perhaps temporarily) or else he or she will be aware that his or her job is in jeopardy.

If the employee has not improved by the time the deadline comes, you will be forced to take the next step-firing the employee. This should be done in an unemotional, matter-of-fact way. Also, you will want to have another senior employee in the room as a witness.

The more businesslike this meeting is, the better. This is not a time for small talk. The employee should be presented with a letter of termination, severance and health benefits information. After the meeting, the employee should be escorted back to his or her desk to gather personal belongings. It's a good idea to have a box available for the employee to pack.

To save the employee the embarrassment of having to face co-workers, the termination should be done at the end of the day so that by the time the employee has to clean out his or her desk, most co-workers will have left. Providing a dignified departure for the employee is your responsibility. Any failure to respect the employee's feelings may result in an employee who wants revenge.

By communicating with the employee and treating him or her with respect, you will minimize the chances of a wrongful discharge lawsuit. If you suspect this occurrence may be unavoidable, you may want to seek legal advice before you make the move.

WHO OWNS THE COPYRIGHT?

The basic principle of U.S. copyright law is that the originator of a creative work owns the copyright of that work. It is important to understand this simple fact or else you may have to learn a hard lesson. Many businessmen thought that since they paid someone to create something, they own that something and could do with it as they pleased. It may work that way for houses, but intellectual property is different.

For example, say that you commission a photographer to take pictures for a company brochure. But what if you also want to use the pictures on your company web site? That's where copyright comes in. Copying a photograph to a web site can only be done by the person who holds the right to copy. And in this case, the artist who owns the copyright is the photographer.

Of course, if the contract transferred the copyright form the photographer to the businessman, then the businessman can reproduce the photographs as he sees fit. If the businessman relied on the photographer to draft the contract, however, the odds are that the photographer retained his copyright.

So, how do you ensure that you have obtained the right to copy the photographs as much as you want? The answer is to have a written contract drafted by lawyer that specifically estates that the photographs are a "work for hire" and that copyright will vest in the purchaser. The contract also needs to say that if, for some reason the photographs are found not to qualify as a "work made for hire," then the photographer agrees to assign his copyrights to you for no further consideration.

In a recent case decided by the U.S. Supreme Court, freelance writers sued The New York Times after the Times included their articles in a database sold to Lexis/Nexis containing the full text of each day's newspaper. At the time the articles were written, the Times had not contemplated reselling the articles in electronic form and had not bought their copyrights. It argued that this was simply a reprint of the newspaper and no new copyright permission was required. The Supreme Court held that copying the writer's work into an online database was a new use for which the consent of the copyright holder was necessary. The Times was forced to pay again for a right it thought it had already bought.

If this can happen to The New York Times, it can happen to you. Make sure you obtain legal advice to ensure you have the right to reproduce the creative work you have purchased in every manner you will require.

BRIEFS

• Cell Phone Privacy-The Third Circuit overturned a Pennsylvania District Court decision that a radio host had violated wiretapping laws by airing a recording of a surreptitiously intercepted cell phone conversation. The District Court ruled that an individual violates the statues by publishing a conversation he or she knows to be illegally obtained even if he or she were not involved in the interception. The Third Circuit said the statutes deterred more speech than necessary to protect the private interests at stake.
• "Delay Damages" Taxable-The Third Circuit upheld a District Court decision that "delay damages added to a couple's award in a personal injury tort action were not exempt from federal income taxes." Under Code § 104 (a)(2), damages on account of personal physical injury or sickness are excluded from gross income, but interest added to a settlement or judgment in a personal injury action is taxable.
• Excluding Stepparents-If you die without leaving a valid will, your money and property will be distributed to others according to your state's interstate succession laws. In most cases, the law divides your property among your closest relatives but in some states, stepparents may be included if they adopted you or can show a long, close relationship with you. Executing a will is the best way to control who gets what.
• Noncompete Agreements-More and more employers are requiring employees to sign noncompete agreements, but the legal system protects the right of a person to earn a living. Courts may find such an agreement to be invalid if they are overly broad; for example, if they cover an unreasonable amount of time or geography. Review the document with a lawyer before making any decisions.