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Fiduciary Duties Between Business Partners

Published on: March 21, 2017 | by David R. Pierce

Does your business partner owe you anything? We’re not talking about money, although that may be an ultimate outcome, we’re talking about how they treat you. Do they owe you any duty to be fair or to bring business opportunities to your company? Whether you are a shareholder in a small, closely held corporation or a member in a limited liability company, the answer to this question is yes, with some exceptions.

Every small business owner, again, whether be it a corporation or limited liability company, has a fiduciary relationship with the other business owners. What is a fiduciary relationship? A person who is a fiduciary is someone charged with a legal and/or ethical relationship of trust with one or more other persons. A fiduciary duty, in turn, is the highest standard of care that can be imposed on someone. A fiduciary is required to be loyal to the beneficiaries of that duty and there must be no conflict of interest between the fiduciary and beneficiaries. The fiduciary cannot profit personally from his position as a fiduciary.

Since each shareholder or limited liability company member owes each other a fiduciary duty the responsibility is reciprocal. Therefore, as a small business owner, you owe a fiduciary duty to your other partners whether you own 60% of the company or 5% of the company and they also owe you a reciprocal fiduciary duty.

Proposed Wage Discrimination Legislation Could Alter New Jersey’s Employment Playing Field

Published on: March 16, 2017 | by John H. Schmidt, Jr.

Although it is presently illegal under the New Jersey Law Against Discrimination (the “LAD”) to pay people different wages for performing the same work under similar working conditions because of their gender, there is currently pending in both the State Senate and Assembly legislation “concerning equal pay for women and employment discrimination, requiring public contractors to report certain employment information.”

Implications for All Employers: As proposed, the new legislation will make it an illegal act of discrimination to pay any employee at a rate of pay, including benefits, which is less that the rate paid by the employer to employees of the other sex for substantially similar work, when viewed as a composite of skill, effort and responsibility. Unlike prior legislation in this area, the proposed legislation codifies five circumstances justifying a pay differential between the sexes, but the employer bears the burden to prove that any of those circumstances exist. In so doing, the bill materially changes the legal standard for establishing wage discrimination.

The proposed legislation also adopts recent New Jersey Supreme Court jurisprudence by specifying that an unlawful employment act occurs each time an individual is adversely affected by a discriminatory compensation practice and paid less because of their sex. Contrary to the federal Lilly Ledbetter Fair Pay Act and current New Jersey law, however, the new legislation does not limit the amount of back pay the aggrieved employee can receive for violations that occur within the applicable statute of limitations period. Rather, under the new bill there is no statute of limitation, and an aggrieved employee can collect back wages retroactive to the date that discriminatory compensation first occurred, so long as the violation continues into the applicable two year statute of limitation of the LAD. Moreover, the proposed legislation prohibits employers from requiring individuals to agree to a shortened statute of limitation as a condition of employment.

How Divorce Can Impact Your Current and Future Social Security Benefits

Published on: March 16, 2017 | by James McGlew, II

One of the questions often asked by divorced individuals, particularly at the time of their retirement or the retirement of their former spouse, is whether or not they are entitled to receive Social Security benefits based on their prior marriage. The Social Security Administration interprets the law with the philosophy that a divorced person may deserve a personal benefit themselves if they were a long-term spouse of a member of the country’s workforce.

Generally, there are two sets of rules which the Social Security Administration applies to determine whether or not an individual will qualify. The first applies if your former spouse is living; the second applies if they are deceased. The interpretation of these rules can sometimes be complicated and is often necessary to have an experienced family law attorney review not only the rules applied by Social Security but the settlement agreement signed at the time of the divorce.

In the first scenario, where the former spouse is still living, the preliminary criteria which need to be met are: (1) your prior marriage lasted for 10 years or more; (2) you are not currently married; and (3) you are 62 years of age or older. Just as important is whether you are entitled to receive Social Security benefits based on your own prior work history. If you are, the amount which you are entitled to receive for your efforts must be less than what you are entitled to receive based on your prior marriage. No individual is entitled to collect both benefits.

Clarification of New Jersey’s Time of Application Rule

Published on: March 15, 2017 | by David R. Pierce

The Appellate Division has recently issued a decision clarifying the applicability of the time of application rule. Effective May 5, 2011 the New Jersey Legislature enacted a change to the Municipal Land Use Law (“MLUL”) that provided the ordinances that would be applied to a development application are those that were in existence at the time a development application is filed. This was a significant change from the prior law under which the development application was subject to any changes in the applicable ordinances that was enacted up until the time when the local board made a decision with respect to the application. Known as the “time of decision” rule, this principle had great potential to work hardship and injustice upon an applicant. Essentially, an applicant could expend significant time and money pursuing a development application, including engineering, planning and legal expenses and numerous appearances before the reviewing board, only to have the rules of the game changed at the last instant.

In order to provide some predictability to applicants and ensure that the application review process was fair, the Legislature provided that the ordinances in effect “on the date of submission of an application for development” govern its review. N.J.S.A. 40:55D-10.5. Naturally, debate emerged about what the constitutes the “submission of an application.” This issue was resolved by the Appellate Division on Dunbar Homes, Inc. v. The Zoning Board of Adjustment of the Twp. of Franklin, 2017 N.J. Super. LEXIS 18.

In Dunbar the applicant had submitted an application to develop a 6.93 acre property with 55 garden apartment units. The applicant submitted its application one day before the existing ordinance was amended to delete garden apartments as a conditionally permitted use in the applicable zoning district. The zoning officer determined that the application submitted was deficient in that it did not contain several documents required to be submitted as a part of the application, including a copy of a submittal letter to the Department of Transportation. As a result it was determined that the application could not proceed as a d(3) variance application for a conditional use variance, but had to instead proceed as an application for a d(1) variance for a non-permitted use. The Board’s decision was founded on the premise that to obtain the protection of the time of application rule the application submitted must be a “complete” application under the MLUL.

Creditor Protection For Inherited IRA

Published on: January 11, 2017 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

In Clark v. Rameker, the United States Supreme Court held that an inherited IRA does not fall within the definition of retirement funds under Federal Bankruptcy law and is, therefore, not exempt from claims in a bankruptcy proceeding. This decision had a considerable impact upon the estate planning world.

It has long been the law that IRA or other retirement accounts, as defined in 11 U.S.C. § 522(b)(3)(C) are exempt from the reach of a bankruptcy trustee. In the Clark decision, the Court was called upon to decide whether funds contained an inherited Individual Retirement Account (“IRA”) qualify as retirement funds “within the meaning of the bankruptcy exemption”. The Court found that an inherited IRA does not qualify for the bankruptcy exemption. In making its decision, the Court identified three independent characteristics which differentiate an IRA from an inherited IRA. Unlike traditional IRAs or Roth IRAs, where one can make an additional contribution to the IRA, the owner/beneficiary of an inherited IRA may never invest additional money in the account. Secondly, an individual owner of an inherited IRA is required to make mandatory required distributions from the account annually beginning in the year after the deceased owner’s death, based upon the life expectancy of the individual who has inherited the IRA account. This is in direct contrast to the owner of a traditional IRA who must withdraw funds without penalty only when he or she is close to retirement age, i.e. age 59 ½. Thirdly, the Court noted that one who has inherited an IRA account may withdraw the entire balance at any time and for any purpose without penalty. The owner of a traditional IRA or other retirement account will pay a ten percent (10%) penalty, subject to some very narrow exceptions, if he withdraws prior to age 59 ½. For these reasons, the Court held that an inherited IRA may not benefit from the protection afforded to the owner or participant in a traditional retirement account.

Interestingly, in New Jersey, however, it has been determined that an inherited IRA constitutes a “qualifying trust” under N.J.S.A. 25:2-1(b) and as such will be excluded from a debtor’s bankruptcy estate. In Re: Andolino, 525B.R.588. The New Jersey Bankruptcy Court found that the language of the New Jersey Statutes exempts the inherited IRA from the bankrupt’s estate. In that regard, N.J.S.A. § 25:2-1(b) provides that “any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualified trust, shall be exempt from all claims of creditors and shall be excluded from the estate in bankruptcy”. Id. A “qualifying trust” refers to a trust “created or qualified and maintained pursuant to Federal law, including but not limited to § 408 of the Internal Revenue Code of 1986. The Bankruptcy Court in New Jersey noted that the IRA’s “status as a qualifying trust remains unchanged, notwithstanding the debtor’s receipt of the IRA as a beneficiary”. Andolino supra, at 591.

Basis Considerations in Lifetime Gift Planning in New Jersey

Published on: January 11, 2017 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

A previous article appearing in Planning Matters discussed the use of lifetime gifts to reduce New Jersey estate taxes. The article pointed out that although there can be advantages to lifetime gifts, there are situations where embarking on a lifetime gifting program in New Jersey is ill-advised. This article will address some of those circumstances where lifetime gifts will not result in a tax benefit.

The starting point for this discussion is the income tax concept of basis. Basis is relevant for determining the gain realized from the sale or other disposition of property for capital gain tax purposes.[1] In general, the basis of property is the cost of the property to the taxpayer.[2] There are special rules with respect to basis where property is acquired by lifetime gift and where property is acquired from a decedent.

In the case of property acquired from a decedent’s estate, Section 1014 provides the general rule that the basis of property in the hands of a beneficiary is the fair market value of the property at the date of the decedent’s death. This concept is oftentimes referred to as “stepped-up basis” because the taxpayer receives a free step-up in basis to the value of the property at the time of the decedent’s death without being subjected to the payment of a capital gain tax.[3]

Court Puts The Brakes On New Overtime Regulations

Published on: November 28, 2016 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

By now, most employers had already implemented or were posed to implement the United States Department of Labor’s (DOL) new overtime rules aimed at swelling the ranks of employees eligible for overtime payments. The rule increased the salary threshold to qualify for the executive, administrative or professional overtime exemptions from $23,660 to $47,476 per year. As a consequence, employers were faced with the prospect of many employees who were previously exempt from overtime requirements being overtime eligible when the rule were scheduled to go into effect on December 1, 2016.

However, in a surprise 11th hour development last Tuesday, a Judge in the U.S. District Court, Eastern District of Texas issued a national preliminary injunction staying implementation of the new DOL rules. The injunction is not a permanent injunction, but merely preserves the status quo until the court can review the merits of arguments by the challenging parties that the DOL overstepped its authority in raising the salary basis test for exemption. Pending a further decision from the Eastern District or an appellate court, employers need not comply with the new salary requirements. While employers generally champion the ruling, the DOL is expected to file an appeal.

What’s an employer to do? For those employers who had yet to take final steps aimed at meeting the new overtime requirements, further action should be delayed until this issue winds its way through the courts. Unfortunately, in anticipation of the regulations many employers notified salaried staff that going forward they would be paid on an hourly basis and be overtime eligible, or alternatively, bumped up the salary of key employees to meet the increased salary basis and preserve the overtime exemption, actions that may not be readily reversed by the employer. Employers should consult with employment law counsel for further guidance on this new development. In all cases, employers cannot assume that the new overtime rules are permanently shelved, and should have a compliance plan in place should the new regulations be revived.

Breaking Up Your Company: Why Shareholder Disputes Take Place

Published on: November 28, 2016 | by David R. Pierce

What is a shareholder dispute or, in other words, shareholder oppression? The terms “shareholder dispute” and “shareholder oppression” are short hand references to business disputes between two or more owners of closely held businesses. Although the phrases both refer to “shareholders” they are used interchangeably by most people to refer to disputes between owners of not only corporations, but between owners of partnerships and limited liability companies. There are important distinctions between the various business entities that can be used, but those are beyond the scope of this introduction.

In a closely held business there are often several shareholders/partners who decided to go into business together. They can be relatives, close friends or even just business acquaintances who realized that they could combine their efforts and make a go of a new business. In many cases there is an inside partner and an outside partner. The inside partner typically is responsible for the production and fulfillment operations of the business while the outside partner is responsible for promoting the business and securing orders for the businesses goods and/or services. Sometimes a business is started by one person with a vision, but they want to share their success with others who have helped them out, when the business founder decides that he or she wants to give those individuals a chance to share in the growth and prosperity of the company, they do so by giving them stock in the company. Other times the founder opens up the ownership of the business to others in an effort to raise capital to help take the business to the next level. Whichever scenario, or even any other scenario that hasn’t been mentioned, there is the very real potential for disputes to develop over, among other things, the management of the business, the direction of the business, the level of effort being expended by owners, the compensation being paid or lack of profits to distribute.

Any of these disputes can blossom into full-fledged, to the death litigation contests, pitting partners, and their respective wills, against each other. Often times the dispute erupts over perceived slights or resentment that has festered beneath the surface for months or even years. These disputes can, and do, usually lead to the breakup of the business relationship. One owner may be compelled to sell his or her interest to the other owner at a price determined through a valuation process. In rare cases the sale of the business to a third party may be forced.

Alimony Statute Amendments From 2014 Can Be Applied To Divorces Finalized Years Earlier

Published on: November 7, 2016 | by James McGlew, II

Today’s current economic reality is one of great uncertainty, especially when it comes to employment. Employees who could count on receiving an annual cost of living adjustment or performance bonus no longer have that luxury, nor the security that their years of experience and training will translate into an equal or higher-paying position should they lose their job. These realities of employment cut across the entire New Jersey labor market, yet they have an even deeper impact when faced by divorced individuals with existing alimony obligations.

Alimony, which is sometimes referred to as spousal support or maintenance, is defined as the obligation upon one spouse to provide financial support to his or her spouse before or after marital separation or divorce. In 2014 the New Jersey Legislature passed, and the Governor signed, an alimony reform bill which “modernized” how alimony awards are to be calculated. One change in the new alimony statute deals with how judges can interpret cases where the payor of alimony attempts to lower or all together eliminate their alimony obligations due to job loss.

Recently, a Superior Court judge in New Jersey rendered a decision effecting thousands of divorced spouses in our state. The judge’s ruling confirmed for the first time that the 2014 alimony overhaul would not just apply to individuals divorced since the revisions were enacted two years ago, but to all divorced individuals currently paying or receiving alimony.

Recent Changes to New Jersey Estate Tax

Published on: October 31, 2016 | by Anne Marie Robbins and Lindabury, McCormick, Estabrook & Cooper, P.C.

On October 14, 2016, Governor Christie signed a bill that raises the gasoline tax 23 cents per gallon, effective November 1, 2016. There will also be a reduction in the sales tax from 7% to 6.625%, to be phased in over two years.

Other provisions of the new law have an impact on New Jersey estate and income taxes. Specifically, the New Jersey estate tax exemption will increase, effective January 1, 2017, from its present $675,000 to $2,000,000, with a complete elimination of the New Jersey estate tax slated to be effective January 1, 2018. Note that these changes are to the New Jersey estate tax regime; the New Jersey inheritance tax, which applies to gifts to persons other than spouses, direct descendants, and direct ancestors, was not changed and remains effective at rates of 11% to 16%.

The effect of the change to the estate tax law is that New Jersey taxpayers will be able to shelter more of their assets from taxation. While gifts to spouses at death do not bear tax under either New Jersey or federal law because of the unlimited marital deduction (for U.S. citizens), the new law means that upon the death of the second spouse, with appropriate planning a married couple will be able to shelter from the New Jersey estate tax up to $4 million of assets for their descendants. The federal estate tax exemption, also called the Basic Exclusion Amount, is much higher and is indexed for inflation. That exemption stands at $5.45 million per taxpayer in 2016, increasing to $5.49 million in 2017.