Second Quarter, 2018
Welcome to Elwell and Spain's Second Quarter Newsletter. We hope you find the information below informative. In this newsletter, we look at the new POLSTAT form available in Oklahoma. These new forms give physicians a greater role in their patients' end-of-life decisions. Next, we look at the recent Tax Court case Burke. This case emphasizes the negative consequences of not formalizing loan agreements. Finally, we review asset protection strategies because of the recent John v. Saint Francis Hospital decision. Happy reading!
Oklahoma’s New Physician Guided Directive
Oklahoma recently enacted the Physician Orders for Life Sustaining Treatment Act (POLSTAT). This new law creates a physician order form meant to give patients greater control over their end of life circumstances. POLSTAT laws have been adopted by over forty (40) states starting in 1991.
The hope is that POLSTAT forms will create a clearer picture of end-of-life situations than Advanced Directives and Healthcare Powers of Attorney. Unlike Advanced Directives and Powers of Attorney, a physician must sign the POLSTAT form. The inclusion of a physician in the decision-making process is new for Oklahoma medical directives. Physician involvement may provide a more practical guide for the end of life.
Even though POLSTAT forms offer certain advantages, they are not a replacement for Advanced Directives or Healthcare Power of Attorneys. POLSTAT forms are complimentary to previously executed healthcare documents. For example, the POLSTAT does not allow for the appointment of an agent or proxy to act on behalf of a patient when incapacitated. This appointment is often critical in healthcare situations. Furthermore, POLSTAT forms are only intended for people in frail or near-death circumstances. Ideally, once completed, the POLSTAT will travel with the patient throughout the healthcare system.
POLSTAT forms are uniform and are printed on bright pink paper with the goal of ensuring that the document is easy to find. Physicians should review the POLSTAT form with patients and assist in making decisions. Physicians are not required to help a patient create a POLSTAT and will not be held liable for following a POLSTAT in good faith.
Burke v. Commissioner: Another Reason to Formalize Loan Agreements
Individuals and businesses loaning money to businesses should be careful to ensure that the loan is not a capital contribution. At times investors can be vague about identifying a new influx of cash as a loan or a capital contribution because it is a handshake agreement. Some investors may even be intentionally ambiguous, waiting to see how the investment performs before deciding which form the funding takes. The delay in making a determination and the lack of memorialization can prove costly to those providing capital. The U.S. Tax Court recently gave investors another reason to paper-up and formalize their investments. In Burke v. Commissioner, an investor was denied a deduction for a bad loan he made because the loan was indistinguishable from a capital contribution.
Whether or not a loan is actually a debt is determined on a case by case basis using a number of factors. Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980). These factors include: names given to the certificates of indebtedness, presence of maturity date, source of payments, right to enforce payment, status compared to other creditors, intent of the parties, adequate capitalization, identity of interest between creditors and stockholders, payment of interest out of dividend money, ability to obtain loans from outside institutions. A.R. Lantz Co., 424 F.2d 1330, 1333. Complying with these factors gives weight to an assertion that the funding was a loan.
In this case, Burke invested money in a friend’s tropical diving business. After his friend’s death, he continued to invest money in the business as his friend’s wife took over and greatly expanded the business. For over a decade, Burke poured cash into the business. Despite these injections of cash, the business never became financially viable. Burke eventually shut off the money supply, effectively causing the business to fail. While making payments to the company, Burke had never received a loan payment. Furthermore, it appears that the diving company had access to alternative funding, although it continued to survive on Burke’s seemingly generous contributions.
Ultimately, Burke’s attempt to claim a deduction was a post-business attempt to salvage a worst-case scenario. The Court seems to be persuaded mostly by the fact that Burke did not treat these cash advances as loans until his attorneys told him to take a loss on the investment. In other words, Burke treated the money as contributions until he realized the business would not be profitable. This late planning was ultimately fatal to Burke’s attempt to have his investments construed as loans.
Business owners and investors will often find it easier and cheaper not to formalize agreements. These decisions are usually made without considering the negative consequences. Informal contracts often lead to confusion, misunderstood expectations, and a higher possibility of litigation. The Burke decision is another bullet point in a long list of reasons to properly formalize agreements, especially when large sums of money are at risk. If an investor or business owner cannot decide if funding is a loan or a capital contribution, both parties may be better off looking elsewhere for venture partners.
John v. Saint Francis Hospital Puts MedMal Asset Protection Front of Mind
Every physician has contemplated protecting their assets from a malpractice claim. With the recent John v. Saint Francis Hospital ruling, a review of several common asset protection strategies is advisable. Thoughtful planning can help protect assets and avoid unnecessary complications. Although physicians are used as examples below, the general principles can apply outside of the medical professions as well.
Create An LLC
Yes, a limited liability company does provide some liability protection. The problem is that the LLC only limits liability for certain kinds of claims – namely contractual claims and business-related claims. LLCs generally do not protect the business owner against injuries caused by the actions or inactions of the owner, a common misconception. In other words, LLC’s do not prevent personal liability for negligence. For example, if a physician negligently causes an injury, an LLC will almost certainly not protect the physician from a malpractice claim.
If an LLC will not protect against torts, should physicians and other small business owners create LLCs?
Generally, the answer is an emphatic yes. Although not a defense to torts, LLCs can protect against certain contractual creditors, force creditors to use charging orders, and provide the opportunity for tax planning. LLCs will also help organize a company with multiple owners, helping to prevent misunderstandings and disputes.
Create a Revocable Trust
Although often assumed, trusts do not protect assets from a lawsuit. The confusion probably stems from the fact that there are two different trust types: revocable and irrevocable. A revocable trust can be revoked by the grantor; that is, it can be renounced and removed. A revocable trust can also be modified by the grantor (the grantor is the one that creates the trust and transfers property to the trust). Because the grantor has control of the assets in the trust and can alter how the assets are used, the trust’s assets are legally still owned by the grantor. On the other hand, an irrevocable trust cannot be changed, except in exceptional circumstances. Once assets are transferred to an irrevocable trust, the grantor loses absolute control of the assets. An irrevocable trust may provide some asset protection; but, the assets will no longer be under the control of the grantor.
Oklahoma Family Preservation Trust?
This newer breed of trust can be irrevocable or, more interestingly, revocable. Oklahoma is not the only state in the country with this type of trust; but, it is the only state that allows the trust to be revocable. Generally, this type of trust protects unlimited Oklahoma assets from creditors.
Sounds great. But, there are some potential downsides. First, only immediate family members can be beneficiaries of the trust and the grantor cannot be a beneficiary. So far, we do not know if the trust would still be valid if a grantor’s spouse used trust assets to benefit the grantor. Second, there is no case law on this type of trust. We do not know if it will withstand a constitutional challenge in the courts. Third, the trust requires a bank’s trust department or trust company to serve as a trustee or co-trustee. The trustee oversight will add extra costs and may make the trust unfeasible for some. These types of trusts may be useful in some circumstances. But, Oklahomans should be hesitant before using this trust, reserving it for only the most beneficial situations.
So, should you have a trust?
Yes, revocable trusts still have a valid purpose in estate planning. Revocable trusts will not protect your assets from lawsuits. But, they will help protect you and your assets from onerous court proceedings such as Guardianships and Probate.
Transfer the Property to Someone Else
Maybe you think that a friend or a family member has less liability risk, so you transfer the property to that person for safekeeping. You may have compounded the problem. Not only does the transfer expose the assets to the liabilities of the person you transferred it to; you have opened yourself up to another type of liability. That very honorable and trustworthy person that you transferred the property to, now has the authority to take or sell the property. After all, they own the property now. These transfers may also run afoul of Oklahoma’s Fraudulent Transfers Act when intentionally used to defraud creditors.
In most circumstances, transferring property to another person to avoid liability is less a strategy and more of a speculative gamble.
What Does Work?
There is no magic panacea for malpractice and general liability. But, there are good places to start. Two come to mind: insurance and planning. Although not as interesting as some of the strategies above, insurance is usually a solid first building block. Are there gaps in malpractice coverage that require tail coverage? Does the malpractice insurance allow for your approval of settlements? Does umbrella insurance have a place? Effective planning can also help sort these various questions, identify already protected assets (homestead, retirement plans), and help recognize areas that need protection.