NEW LLC ARTICLES OF ORGANIZATION LAWS

As of July 1, 2017, there have been several statutory changes to the Limited Liability Act, 805 ILCS 180, et seqwhich could affect your current LLC, or your venture to start one up in the future. The law aims to conform Illinois Law more closely with a law drafted by the National Conference of Commissioners on Uniform State Laws. Fifteen states and the District of Columbia have already adapted the law as the Conference wrote it, and Illinois has made changes modeled after it. 

Default Member Management
Under the revised law, an LLC is now assumed to be member-managed by default. Unless there is explicit language in the operating agreement stating that the LLC is to be manager-managed, this default member-managed status will be the standard. Also, similar to Delaware, when filing Articles of Organization for an Illinois LLC, you will no longer be required to specify whether it will be member-managed or manager-managed, but instead will only be required to provide information regarding each manager and each member having such management authority. 

Oral Operating Agreements
It is now permitted to make oral and implied operating agreements, and such agreements are also expressly exempted from the statute of frauds.

Note: Because the rule on oral operating agreements is rather new, it is advisable to consider continuing to draft operating agreements in written documents to be executed by members and managers; it will soon become clear how the oral operating agreements will play out. If you have an existing operating agreement, revisions may be warranted. Schedule a consultation with our office today to ensure your LLC's operating agreement is still up-to-date. 

Designating Specific Authority of Members and Managers
By filing a "Statement of Authority," Illinois LLCs can now establish or limit the authority of a member or manager to enter into other transactions on behalf of the LLC, including real estate transactions. A Statement of Denial may be filed with the Illinois Secretary of State if the member or manager opts to deny the powers granted to him or her in the Statement of Authority.

Waiver of Fiduciary Duties
Fiduciary duties may now be eliminated or restricted through the operating agreement, with the exception of the duty of care. The relevant language in the document must be clear and unambiguous. Although the duty of care cannot be completely eliminated, the operating agreement can now alter the duty of care so long as it does not authorize intentional misconduct or a knowing violation of law.

Limitation of Member’s or Manager’s Liability
Under the new, revised law, a member or manager may now eliminate or restrict their liability to the LLC and other members, unless the liability relates to a breach of certain fiduciary duties not entitled to the member or manager, or an intentional infliction of harm on the LLC or another member or an intentional crime.

Elimination of Assumed Agency Status
A member of an LLC is no longer considered an agent of the LLC solely as a result of being a member.

Access to Books and Records
LLCs may now impose reasonable restrictions and conditions on access to books and records of the LLC. The new law also clarifies the rights of members, disassociated members and transferees. 

Authorized Signatories for State Filings
Any document filed with the Secretary of State may now be signed by any person who is authorized by the LLC, both digitally and in paper form. The name and title of the person signing are required to be printed or typed where indicated on whichever form is applicable to the purpose intended by the LLC. 

Administrative Dissolution
When an LLC is dissolved administratively, for three years after the dissolution no other entity may take on its name. If the LLC becomes reinstated within the three year period, it will resume the usage of its previous name. 

Conversion
The Act now permits a GP, LP, Business Trust or Corporation to be converted into an LLC, and vice versa, rather than only a GP and LP. Previous to the revised and updated law, only an entity other than a partnership could convert to an Illinois LLC through a complex process including a merger. Now, the entity may simply file "Articles of Conversion" with the Illinois Secretary of State, and the process is complete. 

Domestication
Through the filing of "Articles of Domestication" with the Secretary of State, a foreign LLC will be permitted to become an Illinois LLC. 

Please let us know how we can help. Schedule a consultation today!

Incorporation by Reference

In re ESTATE OF OLIVE CLINE MESKIMEN, 39 Ill. 2d 415 (1968).

In order for a document to be incorporated by reference in a will, three things are necessary: (1) the will itself must refer to such paper to be incorporated as being in existence at the time of the execution of the will and in such a way as to reasonably identify such paper in the will and in such a way as to show the testator's intention to incorporate the instrument in the will and make it a part thereof; (2) such document must in fact be in existence at the time of the execution of the will; (3) such instrument must correspond to the description in the will and must be shown to be the instrument therein referred to. All three requisites must coexist in order to incorporate an extrinsic document into a will.

 

Power of Attorney for Health Care (Illinois)

By Matthew A. Quick Effective January 1, 2015, the Power of Attorney Act relating to health care powers of attorney will change and a new form will be prescribed that includes a different notice and some different contents and directives.

Please note: if you currently have a valid power of attorney for health care, the savings clause of the new law provides that existing powers of attorney for health care will remain valid.

I am happy to help with any questions.

Assessment Lien and Foreclosure (Illinois)

By Matthew A. Quick In the case of 1010 Lake Shore Association v Deutsche Bank National Trust Company, the Court held that a bank shall pay outstanding assessments due on a condo, including assessments incurred prior to bank's purchase of condo, and any late fees. A lien created under Section 9(g)(1) of Condominium Property Act for unpaid assessments by a previous owner is fully extinguished after judicial foreclosure and sale when the buyer (in this case the bank) pays assessments.

Residential Real Property Disclosure Report (Illinois)

By Matthew A. Quick The Illinois Court of Appeals in Messerly v Boehmke ruled on a case that involved an incomplete residential real property disclosure report and the purchasers suing the sellers regarding information that was not included on the report because it was left blank. The Court said that the purchasers of residential real estate did not waive their right to recovery against the sellers because they relied on an incomplete residential real property disclosure report.

The lesson: sellers should, in good faith, complete the entire residential real property disclosure report for consideration by the purchasers to give full disclosure of the premises and forestall an action regarding information not contained on the report.

Quit Claim Deeds and Continuation of Title Insurance

By Matthew A. Quick Title insurance coverage is dictated by the terms of the policy issued by the title insurance company. In most, if not all, policies for title insurance there is a provision for "Continuation of Coverage" or "Continuation of Insurance." Typically, this provision provides that the insurance will continue only so long as the insured holds an interest in the land or has liability by reason of warranties given in any transfer of the title.

It is common for real estate to be conveyed with quit claim deeds and/or no title insurance. Perhaps the informality is due to estate planning or the relationship between the grantor and grantee, nonetheless the conveyance is without warranties, thus, could discontinue title insurance coverage.

To address this issue there usually exists a policy modification endorsement that can be purchased from the title insurance company when any deed modifies the current vesting. However, this endorsement does not cover a quit claim deed to a completely unrelated third-party. It will typically cover a spouse that is added or removed from title, or if property is moved into trust.

In addition, consider using warranty deeds to effectuate property transfers rather than quit claim deeds. If a warranty deed is the proper convincing method, it may be useful in continuing the insurance coverage. That is to say, if a title problem arises, the grantees may be able to look back to the grantor for title coverage.

The lesson: Before transferring real estate, talk with an attorney to avoid unintended consequences.

Trusts and Doctrine of Election (Illinois)

By Matthew A. Quick The court in the case of In re Estate of Boyar stated that the doctrine of election applies to testamentary trusts and because the petitioner accepted property under the trust, thus ratifying it, the petitioner is barred from maintaining action to contest last amendment to the trust. The court opined that the rules of will construction apply to testamentary trusts that differ from wills in form but not in purpose or substance. The doctrine of election applies regardless of value of property taken under trust. By taking and retaining property, despite repeated requests for its return, the beneficiary makes a binding election which cannot be negated by later attempting to return the property.

Trusts and Equitable Deviation (Illinois)

By Matthew A. Quick In the case of Church of the Little Flower v US Bank the Court was asked to reform a trust based upon the doctrine of equitable deviation. The Court held that this doctrine did not apply and the trust could not be reformed. The Court stated that the doctrine of equitable deviation should not apply for the sole reason of further rewarding the beneficiaries, but only in situations where the trust is so inefficient that its continuation would necessarily interfere with the trust's purpose.

The lesson: before executing a trust, ensure the provisions of the trust will properly distribute funds to the beneficiaries.

Correcting a Recorded Deed (Illinois)

By Matthew A. Quick Typically, in order to correct a deed that has been recorded, the original, recorded deed must be used. The information on the deed that requires correction must not be erased or scribbled out and corrected, but crossed out and corrected. The corrected deed must state that the deed is being re-recorded to correct [whatever the error or deficiency]. In addition, a new filing fee will be collected, therefore, there must be enough space on the first page of the deed for a new stamp. If there is not enough room on the first page of the deed for a new stamp then a cover page must be added.

Explore the accuracy of this process with the recorder's office before altering any deed.

Donation of Home and Tax Deduction

By Matthew A. Quick In the case of Rolfs v. Commissioner of Internal Revenue, the Court stated that the donation of a house to a fire department for the purpose of burning the building for fire department training did not result in the ability of the taxpayers to realize a deduction of the entire value of the building. In fact, the Court stated that the taxpayers received a benefit from the free demolition of the home.

Contracts and "Cooling-Off Periods" (Michigan)

By Matthew A. Quick As a general rule, consumers do not have a right to cancel a contract for the sale of goods or services, but certain instances exist when consumers have a right to a "cooling-off period" where, by law, a specific time is allowed to cancel a contract after signing it.

The first thing anyone should do when determining his or her rights under a contract is READ YOUR CONTRACT. Contract provisions have the ultimate effect on the rights of the parties. If the contract provisions do not provide the relief sought, the following laws may: Michigan's Gift Promotion Act (MCL 445.931), Michigan's Home Solicitation Sales Act (MCL 445.111, et seq.), Michigan's Home Improvement Finance Act (MCL 445.1101, et seq.). The Federal Trade Commission has a similar rule for sales made at someone's home (16 CFR 429, et seq.), as does the Federal Truth in Lending Act for home equity loans.

These acts require the sellers to provide written notice in the contract of the rights afforded by the acts. If the required notice is not provided by the sellers in the contract, the length of time the consumer has to cancel the contract may be extended.

The lesson: If you engage in a business that sells goods, services or does home improvement (plumbing, electrician, construction, etc.), be sure you have the language required by law in your contracts. Failure to do so could mean the consumer has a broader timeframe in which to cancel the contract.

Plat Act Affidavit (Illinois)

By Matthew A. Quick As a general rule, a plat act affidavit, as prescribed by Illinois law (765 ILCS 205, et seq., referred to as the "Plat Act"), only must be executed and filed with the recorder of deeds if the property being transferred is not in a subdivision, meaning the property being transferred has a metes and bounds legal description.

Probate Actions and the Limitation Period (Illinois)

By Matthew A. Quick In the case of Bjork v O'Meara the court held that the limitation period for will contests as provided for in the Probate Act (6 months from notice/publication), applies to an action for tortious interference with testamentary expectancy.

The lesson: when someone has a problem with an estate, don't delay! Be sure to talk with an attorney as soon as possible.

Self-Settled Trusts and Fraudulent Transfers (Illinois)

By Matthew A. Quick The case of Rush University Medical Center v Sessions opined that a decedent's transfer of assets to his self-settled spendthrift trust may be set aside and a creditor may reach trust assets under the Fraudulent Transfer Act, 740 ILCS 160/1, et seq., which requires a creditor to satisfy conditions of intent, thus, the common law rule that self-settled trusts are per se fraudulent requires the additional intent element to satisfy an action under the Fraudulent Transfer Act. In addition to an action under the Fraudulent Transfer Act, a creditor may maintain an action under common law that seeks to set aside self-settled trusts in all instances with respect to existing or future creditors.

Medicaid Liens and Estate Recovery

By Matthew A. Quick There are two main ways a state can, and in some circumstances must, reclaim expenses paid on behalf of a Medicaid recipient. The first is a Medicaid Lien, which gives states the ability to recover the expenses of long-term care of a Medicaid recipient by placing a lien on the home of the Medicaid recipient. The second is Estate Recovery, which is the process employed by states to recover the expenses of long-term care paid on behalf of a Medicaid recipient where the state acts as a creditor against the Medicaid recipients estate, post-death.

MEDICAID LIENS

Medicaid Liens typically apply only to the homes of permanently institutionalized individuals. A permanently institutionalized individual is one who cannot reasonably be expected to return home. A Medicaid Lien has priority over other people who claim an interest to a Medicaid recipient's home and its priority over other liens is determined by state law.

There are restrictions on the placement of Medicaid Liens. These restrictions are intended to protect homes when they are needed by Medicaid recipients or certain close family members. The restrictions follow: The Medicaid recipient must be deemed permanently institutionalized; and No lien may be placed if any of the following relatives of the Medicaid recipient live in the home: 1. A spouse; 2. A child under 21, or a blind or permanently disabled child of any age; and 3. A sibling with an equity interest in the home who has lawfully resided in the home for at least one year before the Medicaid recipient’s admission to a medical institution.

A Medicaid Lien does not interfere with the Medicaid recipient’s use of the home. However, if a Medicaid recipient attempts to transfer the home that has a Medicaid Lien, states can require the Medicaid recipient's equity in the home be used to pay the expense of the state's Medicaid expenditures.

ESTATE RECOVERY

Estate Recovery occurs after a Medicaid recipient's death, during the settlement of the deceased Medicaid recipient's estate. Estate Recovery can apply to personal property or real estate, but most commonly it involves the Medicaid recipient's home.

There are restrictions on Estate Recovery, which are again intended to protect homes when they are needed by certain close family members. The restrictions follow: 1. When there exists a surviving child who is under age 21, or a blind or disabled child, no matter where he or she lives (Estate Recovery may take place when the child no longer meets these criteria); 2. When a sibling with an equity interest lives in the home who has lawfully resided in the home for at least one year before the Medicaid recipient’s admission to a medical institution and continuously since; 3. When an adult child lives in the home who has lawfully resided in the home for at least two years before the Medicaid recipient’s admission to a medical institution and continuously since and can establish that he or she provided care that may have delayed the recipient’s admission to the nursing home or other medical institution; and 4. During the lifetime of the surviving spouse, no matter where he or she lives.

In these restricted instances, the survivor can typically inherit the home and other assets to use as they wish. However, the state may place a lien or file a claim against the survivor for payment of the Medicaid expenditures upon the death of the survivor.

Medical Records and Deceased Family Members (Illinois)

By Matthew A. Quick A new law, which took effect November 23, 2011, and is codified at 735 ILCS 5/8-2001.5, creates a procedure and a form to allow certain family members access to the medical records of a family member who has passed without being forced to initiate a court proceeding. The new law allows a surviving spouse to make a request for the records or, if there is no surviving spouse, then an adult child, a parent, or an adult sibling may make the request.

Joint Tax Returns and Couples in Civil Unions (Illinois)

By Matthew A. Quick The Illinois Department of Revenue has confirmed that couples in civil unions shall have the ability to file joint tax returns with the State of Illinois. However, there is still no joint-filing tax status on the federal level, which means each partner must file a return with the IRS as though they are single. Civil union couples continue to not be permitted to file federal income taxes as married, because the federal government does not recognize the union as a legal marriage.

Federal Tax on Sale of Main Home

By Matthew A. Quick We seek to save, even while spending. With a little estate planning, we can continue this trend by saving on the tax imposed on the sale of our main home. It is understood that most of us do not currently pay taxes when our homes are sold, which is due to an exclusion that is given by the government. This exclusion is limited, though, and without some attention we, or our loved ones, could inadvertantly pay a significant tax on something that could have easily been avoided.

The Absolute Basics

The amount of federal tax on the sale of someone's primary residence is determined by taking the amount realized (the proceeds from the sale of the home) and reducing it by the adjusted basis (the cost of the home). If the difference is a positive number, then there is a gain and a gain is treated as income, which can be taxed.

On the other hand, if the difference is a negative number, then there is a loss. Typically, losses can be deducted from taxable income, which reduces the amount of income taxed. However, a loss taken on the sale of a primary residence cannot be deducted from taxable income. For this reason, this article will not further contemplate losses.

Due to a gain exclusion (which will be covered below), tax is normally not paid on the sale of a primary residence. In order to talk about a gain exclusion, we have to talk about gain and in order to figure gain, we have to talk about adjusted basis.

Determining Adjusted Basis

Adjusted basis is the benchmark of an investment. It is the point of reference when determining the cost of an investment, which is further used to determine whether the value of the investment went up or down.

The first factor in the adjusted basis calculation is to determine how the owner got the home. If the owner bought it or built it, then the adjusted basis is the cost of the purchase (down payment and loans) or build (cost of construction). If the owner got it as a gift, typically, the adjusted basis is the same as the previous owner's. If the owner got it as inheritance, typically, the adjusted basis is the fair market value of the home on the date of the decedent's death.

NOTE: If you owned your home jointly with your spouse and your spouse has passed, your basis in the home will change. The new basis for the half interest that you receive from the deceased spouse will be one-half of the fair market value on the date of death. The basis in your half will remain one-half of the adjusted basis determined from the initial adjusted basis. Your new basis in the home is the total of these two amounts. An example from the IRS website follows:

Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).

NOTE: Some basis situations are not contemplated in this article, such as adjusted basis when receiving property in a divorce settlement, adjusted basis when a home is built using insurance proceeds, etc. If you have a question about a certain basis situation, please contact an attorney.

The second factor is to add to the adjusted basis the costs of getting the home, called settlement fees or closing costs. These costs include installation of utilities, abstract of title fees, legal fees, recording fees, survey fees, transfer taxes, title insurance, certain real estate taxes, any amounts the seller owes that the buyer agrees to pay, etc. NOTE: not all settlement fees or closing costs may be used to adjust basis. If you have a question about a certain fee, please contact an attorney.

The third factor is to add to the adjusted basis additions and improvements to the home. In order to qualify as an addition or improvement that can be added to the adjusted basis, the addition or improvement must have a useful life of more than one year. This can include basic additions and improvements (new or improved bathroom, new or improved deck, new or improved kitchen, etc.), funds expended for special assessments for local improvements (a condo special assessment for a new roof), as well as amounts spent after a casualty to restore damaged property.

NOTE: there are several factors that decrease the adjusted basis that are not contemplated in this article, which may lead to greater gain (discharge of some or all of the debt incurred for purchase or development of the home, insurance payments for casualty losses, residential energy credits claimed, etc.). If you have a question about a certain deduction in adjusted basis, please contact an attorney.

Determining Gain

Again, to determine the amount of gain, take the amount realized and reduce it by the adjusted basis. To calculate the amount realized, take the selling price and subtract any selling expenses and personal property that was sold with the home. Selling expenses can include real estate broker commissions, advertising fees, legal fees, etc. If you have a question about selling expenses, please contact an attorney.

How about a few examples?

Example One: Home Was Purchased Take the amount realized (let's say the selling price was $505,000 and the amount of selling expenses and the personal property that was sold with the home is $5,000 ($505,000 - $5,000 = $500,000)), which is $500,000, and reduce it by the adjusted basis from the purchase (let's say the house was purchased for $130,000, the settlement fees and closing fees total $3,000, and there was an extra room added for $17,000 ($130,000 + $3,000 + $17,000 = $150,000)), which is $150,000. The total gain on the home would be $350,000.

Example Two: Home Was Gifted During the Original Owner's Life Assume the same amount realized from Example One ($500,000) and reduce it by the adjusted basis from the original owner, since the property was given during the original owner's life (let's say the original owner's adjusted basis was $50,000 and there was an extra room added by the subsequent owner for $20,000 ($50,000 + $20,000 = $70,000)). The total gain on the home would be $430,000.

Example Three: Home Was Inherited Assume the same amount realized from Example One ($500,000) and reduce it by the adjusted basis, which would be the fair market value on the date of the previous owner's death (let's say the fair market value on the date of the previous owner's death is $420,000 and there was an extra room added by the subsequent owner for $20,000 ($420,000 + $20,000 = $440,000)). The total gain on the home would be $60,000.

The Gain Exclusion

After calculating the gain, let's explore the gain exclusion. To qualify for the gain exclusion, an owner must have owned the home for at least two years and lived in the home as the owner's main home for at least two years during the previous five years. If the owner meets the exclusion, then the owner can exclude up to $250,000 if filing a single return, and $500,000 if married and filing a joint return.

Calculating the Tax

Let's determine the tax of the previous examples for a single person and a married couple assuming a 15% long term capital gains tax:

Example One Gain was $350,000. A single person using the exclusion would have a gain of $100,000 and a tax of $15,000. A married couple using the exclusion would have a gain of $0 and a tax of $0.

Example Two Gain was $430,000. A single person using the exclusion would have a gain of $180,000 and a tax of $27,000. A married couple using the exclusion would have a gain of $0 and a tax of $0.

Example Three Gain was $60,000. A single person using the exclusion would have a gain of $0 and a tax of $0. A married couple using the exclusion would have a gain of $0 and a tax of $0.

Taking from The Examples

A quick analysis of the amount of tax in each example would yield the understanding that a higher adjusted basis, thus a lower gain, is key to minimizing tax. People will gift their property during their lives, which can be a big mistake (they are also gifting their assumably low basis). There are so many other easy ways to gift property, than just outright, that would carry the benefit of a stepped up basis and reduction of tax. A reduction that could possibly be several thousand dollars.

Please feel free to contact me for any further explanation of this article or to answer any questions; I am always happy to help.

Transfer on Death Instrument (Illinois)

By Matthew A. Quick A very effective and efficient estate planning tool has been made available in Illinois as of January 1, 2012, especially suited for people who want to make an outright distribution of their property without the protections of a trust. A new Illinois law, called the Illinois Residential Real Property Transfer on Death Instrument Act, at 755 ILCS 27/1, et seq., allows owners to transfer their Illinois residential real estate outside of probate using a prerecorded instrument, which is akin to a deed, but referred to in the new law as a "Transfer on Death Instrument." Practically speaking, this law allows an owner to indicate who should be the beneficiary of certain real estate before the owner's passing. Upon the death of the owner, the property will simply pass to the beneficiary with minimal administration (basically all that is required is the filing of an executed form, there is no requirement of probate and no requirement of a trust arrangement).

Highlights of the new act: The real estate must be residential (a building with less than 4 units, a condo, etc.); The instrument will always be revocable, even if contrary language is contained in the instrument; The beneficiaries, but not creators of the instruments, can be business entities; and The owner may deal with his or her residential real estate during his or her life without restriction.

The instrument: It must meet the requirements of a properly recordable deed and be witnessed (witnessed in the same way as a last will and testament, which is different from the execution of a deed); It must state that the transfer is to occur at the owner's death; and It must be recorded with the recorder before the owner's death.

Since the statute did not dictate any forms for use, please consult an attorney to draft an instrument if you are interested. When utilized correctly, a Transfer on Death Instrument can be an extremely efficient means of transferring property without the use of a trust arrangement or the probate process and would make a great addition to a basic estate plan.