REPORT FROM COUNSEL

HENNINGSON & SNOXELL, LTD. ATTORNEYS RECOGNIZED

Adding to the list of professional awards and recognition received by various firm attorneys this year, the colleagues and staff of Henningson & Snoxell, Ltd. congratulate attorneys Craig Dokken and Scott Wold for being set apart for special recognition by The Journal of Law and Politics and their colleagues in the legal community resulting from a recent statewide survey of attorneys.

Craig Dokken and Scott Wold have each been named as Minnesota "Rising Stars" in the legal community.

When asked how he felt about the recognition, John commented, "While I am honored to be recognized by my peers, I am especially pleased to be surrounded by my colleagues in the Estate Planning and Trust department who help me be a better lawyer. Our staff also works very hard to help us better serve our clients and, in doing so, makes us better attorneys."

Craig T. Dokken has been recognized as one of Minnesota's "Rising Stars. Craig joined the firm in June 2002 and has extensive experience litigating a wide range of commercial disputes. He represents businesses of various sizes ranging from small family businesses to large publicly held companies. Craig's experience enables him to confidently provide his clients with needed advice and courtroom representation regarding their business and employment related issues. Craig has, and continues to be active in local and state Bar Association activities and currently serves on the Board of Governors and House of Delegates of the Minnesota State Bar Association. He is a frequent lecturer at professional seminars and is an adjunct professor of business law at Hamline University.

Scott A. Wold has also been recognized as one of Minnesota's "Rising Stars". Scott has been with Henningson & Snoxell, Ltd. since 1994 and is a member of the firm's Litigation and Business Departments. Scott focuses his practice on business litigation and employment law and represents businesses and individuals in a variety of commercial disputes, such as breach of contract cases, shareholder and partner disputes, and cases including consumer fraud claims. His employment law practice primarily involves counseling the firm's business clients regarding employment matters and defending them in lawsuits and administrative actions.

Mr. Wold is a graduate of Bethel College (1991, cum laude) and Southern Methodist University School of Law (1994, cum laude). While attending SMU, he served on the SMU Law Review Association, published an article in the Journal of Air Law & Commerce, and was elected by the SMU faculty to membership in the Order of the Coif. He is currently a member and a past president of the Brooklyn Center Rotary Club. He also is a co-founder of and volunteer at the Park Avenue Legal Clinic.

BEWARE OF PREDATORY HOME LOANS

At a time when stock prices have tumbled, so have interest rates on home equity loans and mortgages, and many homeowners are borrowing against their homes to generate cash. As a result, more people are at risk of being victimized by "predatory" lenders. A predatory loan occurs when a company misleads, tricks, or even coerces someone into taking out a home loan with excessive costs and without regard to the homeowner's ability to repay. The consequences of such a loan can be especially severe since the defaulting borrower could lose the home itself.

For the most part, predatory lending has been associated with companies that specialize in marketing to people with poor credit histories or who are simply strapped for cash. Typical targets are elderly people with high medical bills or overdue home repairs, middle-class individuals swamped by credit card debt, and lower-income consumers with less access to reputable lenders.

A typical consumer may not know the terms for predatory practices, but the borrower will recognize some of these behaviors. In a "bait and switch" scheme, the lender promises one thing but offers something different at closing, when it really matters. "Equity stripping" results from encouraging heavy borrowing from home equity, beyond the consumer's ability to make payments. "Loan flipping" is multiple refinancing, to the point that fees, and possibly higher rates, become unmanageable. When a lender engages in "loan packing," it has added charges to the loan contract for overpriced or unnecessary items.

There are federal laws designed to protect consumers from some of the predatory lending practices. The Truth in Lending Act requires lenders to give timely information about loan terms and costs, and it allows borrowers on loans secured by a home to cancel the loan up to three business days after signing the contract. The Home Ownership and Equity Protection Act requires providers of "high cost" refinancing or home equity loans to give the borrower key information about the loan three days before closing. It also prohibits the making of a home equity loan without regard to a borrower's ability to pay it back. These laws play an important role, but the best deterrent to predatory lending is informed and vigilant consumers.

Some of the most effective preventive measures are only common sense, but in practice they are too often ignored: (1) think through the decision to borrow before taking the plunge, and be wary of a lender who hurries you; (2) select a lender with a good reputation in your community, and steer clear of home improvement contractors or loan brokers who contact you out of the blue; (3) compare quotes from at least three lenders, then negotiate for the best possible deal. And remember, the loan with the lowest monthly payment is not necessarily the best loan; and (4) read and make sure you understand the loan documents before signing them, keeping an eye out for discrepancies between what may have been discussed previously and what is in the fine print.

LIMITED LIABILITY COMPANIES--THE BEST OF ALL WORLDS?

A limited liability company (LLC) is a business structure that combines some of the best features of sole proprietorships, partnerships and corporations. LLC owners, like their counterparts for partnerships or sole proprietorships, report profits or losses on their personal income tax returns. Like a corporation, however, the owners of an LLC have "limited liability," that is, they are shielded from personal liability for many kinds of debts and claims arising from the business.

Limited Liability
The limited liability for LLC owners is not absolute. In general terms, owners still can be held liable if they (1) personally and directly injure someone; (2) personally guarantee a loan or business debt on which the LLC defaults; (3) fail to deposit taxes withheld from employees' wages; (4) intentionally commit a fraudulent or illegal act that harms the company or someone else; or (5) treat the LLC as an extension of their personal affairs rather than as a separate legal entity. The last exception to limited liability carries the potential for complete removal of the protections for individual owners. If the line between LLC business and personal business becomes too blurred, a court could find that a true LLC does not exist, leaving the owners personally liable for their actions.

Ownership
Most states allow a single individual to be the sole owner of an LLC. An LLC makes the most sense in circumstances where there is a concern about personal exposure to lawsuits stemming from operation of the business. Most laws prohibit establishment of an LLC in the banking, trust, and insurance fields.

Unlike corporations, LLCs can carry on their business without holding regular ownership or management meetings. Of course, formal meetings backed up by written minutes still may be advisable to document important decisions, such as a change in membership or a major expenditure.

Formation
Setting up an LLC is relatively simple. Articles of organization must be filed with the appropriate state office, usually the Secretary of State. The articles of organization include the name and principal office for the LLC, the names and addresses of its owners, and the name and address of the person or company that agrees to accept legal papers on behalf of the LLC.

Even if it is not legally required, the owners should prepare an operating agreement that spells out the owners' rights and responsibilities. The absence of an operating agreement will mean that state statutes will govern the operation of the LLC by default. An operating agreement acts as a guide for resolving common issues that an LLC will face, and thereby helps to avert misunderstandings between the owners. It also underscores the authenticity of the LLC itself, which can be helpful when a judge is deciding whether the owners are protected from personal liability.

A standard operating agreement includes the members' percentage interests in the business; the members' rights and responsibilities; the members' voting power; allocation of profits and losses; how the LLC will be managed and; rules for holding meetings and taking votes. Although it is frequently overlooked when an LLC is created, a buy-sell agreement is important as a sort of "premarital agreement" among the owners. The buy-sell provisions can clarify and ease the transition when the inevitable changes come to the members of the LLC.

Taxes
Since an LLC is not considered separate from its owners for tax purposes, the LLC pays no income taxes itself. Like a partnership or sole proprietorship, an LLC is a "pass-through entity." Each owner pays taxes on a share of profits, or deducts a share of losses, on a personal tax return. The IRS regards each member as a self-employed business owner, not an employee of the LLC. There is no tax withholding, and owners must estimate taxes owed for the year, then make quarterly payments to the IRS. Note: In some circumstances, an LLC may be taxed as a corporation.

Conversion
By converting to the LLC business structure, sole proprietors and partnerships can gain the protection afforded to LLC owners without changing the way their business income is taxed. Conversion usually can be accomplished either by filling out a simple form or filing regular articles of organization. Sales tax permits, business licenses, and professional licenses or permits will need to be transferred to the new LLC, or the LLC will have to obtain new ones.

The process for creating an LLC is streamlined and free of highly technical considerations. However, there is an important place for professional advice concerning such matters as choosing an LLC over other business structures, preparing or reviewing the operating agreement, and setting up accounting systems.

IS IT TIME FOR AN ESTATE PLANNING CHECKUP?

Even the most detailed and carefully crafted estate plan should be revisited periodically to make sure that it is in line with changing laws and life circumstances.

• Be sure that estate assets are held in such a way as to minimize estate taxes at death and to avoid overfunding or underfunding of post-death trusts;
• Review the powers of attorney for health care and property to confirm that they reflect current wishes;
• Make adjustments to reflect the death or disability of a beneficiary, or a significant change in a beneficiary's needs;
• Update or prepare a living trust, which allows an estate plan to be carried out with minimal court involvement;
• Retitle assets in your name as trustee of your living trust if you want to avoid probate upon disability or death;
• Review how you hold title to assets (i.e., payable on death, joint tenancy, tenancy by the entirety, etc.);
• If you have not already done so, name appropriate guardians for minor children in your will;
• If you have included a marital gift or a marital trust upon the death of one spouse, consider making the provisions more or less restrictive;
• Examine the scope of "powers of appointment" that allow a survivor to redirect where assets will eventually pass;
• Confirm that the timing as to when a beneficiary will receive or have the right to demand principal is compatible with current wishes;
• Make any revisions suggested by changes in the family such as disabilities, births, deaths, or changed marital status;
• Reassess how title to your home is held;
• Consider the different options for designating beneficiaries for IRA accounts, pension plans, and other assets related to retirement;
• Possibly make annual gifts to children and others free of estate and gift taxes (up to $11,000 per person per year in 2002);
• Consider setting up separate trusts or Section 529 education funding plans for children or grandchildren.

In addition to these considerations, there is a broad range of estate planning options, one or more of which may be desirable based on current circumstances. Among these devices are charitable trusts, irrevocable life insurance trusts, family limited partnerships, family foundations, self-canceling installment notes, and qualified personal residence trusts. A qualified professional can help you sort through the possibilities and arrive at an estate plan that keeps up with changing conditions.

IRS MAKES IT EASIER TO SETTLE TAX DEBTS

The Internal Revenue Service has published new regulations that will make it easier for taxpayers to negotiate settlements of their tax debts. The regulations expand the "offer in compromise" program, under which settlements can be reached with taxpayers who cannot pay their entire tax debts.

Under the old policies, the IRS could accept a taxpayer's offer of settlement only if there was a doubt about whether the taxpayer was liable or the debt could ever be collected. These bases for compromise remain in effect, but the new regulations add flexibility, making the IRS decision to accept or reject a compromise offer dependent on the taxpayer's particular circumstances. The bottom line is that a taxpayer is eligible for a compromise where collection of the entire tax debt would create economic hardship or where there are compelling public policy or equity considerations favoring a settlement.

It may be evidence of hardship if a taxpayer cannot: (1) earn a living due to a long-term illness or disability, and it is foreseeable that resources will be exhausted; (2) pay basic living expenses if assets are liquidated to pay the tax debt; or (3) borrow against equity in assets, and seizure or sale could make it difficult for the IRS to collect the tax debt.

Even with loosened-up rules, the IRS will only come so far to meet a taxpayer in a settlement. The new rules do not allow a compromise that "would undermine compliance with the tax laws." The burden is on the taxpayer to make the case for compromise. Absent exceptional circumstances, the IRS will presume that an uncompromising application of the tax laws gives a fair and equitable result.