Lavelle Legal Services, Ltd.

West Suburban:

1035 South York Road

Bensenville, Illinois 60106

Telephone (630) 238-8616

Attorneys and Financial Counselors

501 West Colfax

Palatine, Illinois 60067

Telephone:847/705.7555

Facsimile: 847/ 705.9960

www.lavellelaw.com

N.W. Suburban:

2200 W. Higgins Road, Suite 115

Hoffman Estates, Illinois 60195

Telephone (847) 882-4224

Chicago Office

208 South La Salle Street

Chicago, Illinois 60604-1003

Telephone: 312/332.7555

Kerry Lavelle . Timothy Hughes

Theodore M. McGinn . Matthew J. Sheahin

Cameron R. Monti . Lauren E Schaaf

North Suburban:

1401 North Western

Lake Forest, Illinois 60045

Telephone (847) 482-9740

Creating your own business is often the dream of those who are fed up with a traditional 9 to 5 job. The possibility building a tremendous amount of wealth as well as a position doing what you enjoy doing makes starting your own business very attractive. However, small businesses fail everyday. Therefore, before embarking on a solely owned business, answers certain questions will predict answers how successful your business will be.

Simply because you have a skill or can do something better than others does not necessarily mean that starting your own business will lead to early retirement. Is such skill a type for which customers will pay money? Are there enough customers out there who will be willing to pay money for such service or product? Finally, will customers pay more than the cost you incur in providing the service or product? Will the customers be paying in cash, or rather in credit? There is a difference between cash flow and income. Income is an accounting term. Cash flow, on the other hand, is cash that you can use to pay bills and/or pay your salary. The service and/or product that you provide must able to generate a sufficient cash-flow in order for you to meet your expenses and pay yourself a reasonable salary.

What is your competitive advantage? In other words, are you able to provide this service or this product better or cheaper than your competitors? If you can not provide an answer to that question, then most likely you will feel the pressure from your competitors (Often larger competitors with greater resources who can market more effectively or sell their products or services for less than you). If you do not have a competitive advantage, you may not survive.

Although no one can really predict the future, your business concept needs to be evaluated in the context of potential future developments. If the service and/or product that you provide is such that new technology will make your product or service obsolete, or negatively effect the demand of your product, then you should think twice before entering into that area. In addition, to the extent that your product or services is dependent upon regulation, what are the possibilities of legislation being passed that could make your product or service less profitable? If these are valid concerns, you need to come up with contingency plans to address such scenario.

Intellectual property is a phrase used to describe property rights which is not represented by a physical matter or real estate. Examples would be trade secrets (a way to produce a product or perform a service unique to competitors), a patent (a legal monopoly granted by the United States government to prohibit others from producing such product or providing such service trademarks (a way of identifying your goods and/or services and differentiating from your competitors). It is crucial that you protect your intellectual property rights. If you fail to take the necessary precautions, you may wind up competing against someone who you taught how to operate. Your intellectual property rights can be protected with contractual agreements and the proper internal controls.

Many people go into a business thinking of how they can set it up and how to provide the service or the product, but they fail to think about exiting from the business. When starting the business, you should set forth your objectives and what you wish to obtain. In addition, protecting intellectual property rights as stated above, will provide value for your company which could be sold to other parties. In addition, as stated above, your business is more valuable if it is not dependent upon any one individual but rather a system in place.

Many people starting a business have a great idea and know exactly how to produce the product or perform the service. What they don't know is how to handle some of the day to day administrative features of the business. The entrepreneur often ignores such matters as preparing accounting statements, keeping track of bank statements, identifying cash flows and expenditures, preparing tax returns, and otherwise performing the necessary accounting functions of the business. As an operator of a business, it is critical that you have the necessary accounting information in order for you to make strategic decisions as to how best use your limited resources. It is tremendously easier to gather this information from the start, rather than waiting several years, hiring an accountant at that point and asking them to go back a reproduce all the helpful financial statements.

When starting a business, there is a tremendous amount of excitement. However, before blindly jumping into the fray, every entrepreneur should sit back, prepare a business plan, outline answers to the above questions to determine if the business concept is feasible.

Income taxes are dischargeable in bankruptcy provided they meet a four-part test. That three part test consists of: 1) the tax year is older than three years; 2) that he return has been filed more than two years prior to the petition; 3) an assessment was made more than 240 days prior to the bankruptcy petition being filed; and 4) there is no fraud associated with the payment or collection of the tax liability.

With the exception of second step which may be problematic if the IRS has prepared a substitute return for a taxpayer who did not file timely prior to the taxpayers filing an original return the three part test is pretty straight forward in the context of bankruptcy and tax law.

However, a recent New York case denied the taxpayer discharge of an IRS liability stemming from tax years 1980, 1981 1982, as well as, 1993 through 1995. The debtor filed for bankruptcy in 1999 and was granted a discharge with respect to all debts that were dischargeable. However, in that case the IRS challenged the debtor, asserting that the IRS claim was not dischargeable since the debtor willfully attempted to evade or defeat the tax, thereby disqualified the debtor from discharge. The IRS contended that her lavish lifestyle which included $6,000.00 a month rental for a three bedroom apartment on New York Central Park, religious and charitable contributions of approximately $20,000.00 a year mostly to a religious organization in which the debtor was an ordained minister and included several trips to California and China for spiritual education.

The court in siding with the IRS noted that debtor for sometime had been averaging paying $2,500.00 on credit cards and by the time of her filing bankruptcy had no credit card debt which the court interpreted that the debtor had gave higher priority to credit card obligations than her tax obligation. Further, the court noted that the debtor frustrated collection efforts by cancelling direct deposits on accounts where she had disclosed the existence of to the IRS.

While the Bankruptcy Court did provide the debtor with an Order of Discharge, the entry of that discharge may not indicate an abuse of the bankruptcy system as she will be barred from filing chapter 7 again for six years. And since she only had the IRS as a creditor, it is questionable whether the debtor would have received the same order had she more creditors than the IRS whose claim survived the bankruptcy case. This case shows how important it is to analyze a debtor’s case prior to filing for bankruptcy protection.

What is a family’s largest asset? Often times it is the family home; however, now it might be your retirement fund. How it is titled, and how the beneficiaries are structured may have a significant tax impact. Few financial planners fully understand the complexities surrounding the use of trusts and children as the beneficiaries of an IRA. Complicated, technical rules, income tax regulations regarding trust distributions affecting IRA distributions as well as impractical and administrative difficulties often cause a tremendous amount of frustration and confusion.

Typically, upon the death of an IRA holder, the IRA “rolls over” to the spouse, and the IRA is not fully taxable, unless it would have been taxable in the hands of the decedent or the spouse. The spouse effectively takes the IRA “roll over” and applies the rules relating to minimum distributions and taxation, based upon his or her life. However note that the beneficiary must be an individual with a birth date. The designations to “charities” or “my estate” will not qualify for any sort of roll over treatment.

As an alternative to rolling over the IRA to a spouse, children or a group of beneficiaries (including a trust) could be named as the beneficiaries of the IRA, under certain circumstances. So the decedent’s estate does not have immediate income of the entire IRA corpus, planning is necessary to allow the estate to “stretch” out its tax payments.

Five basic rules must be followed if beneficiaries of a trust are to be considered designated beneficiaries of an IRA and thus eligible for the stretching distribution rules:

3. The trust must be irrevocable or become irrevocable upon the death of the participant;

If these rules are met under the time limitations set forth in the Treasury Regulations, distributions can be made over the oldest designated beneficiaries’ life expectancy. There are various advantages and disadvantages to naming revocable trusts as the beneficiary of your IRA which must be carefully scrutinized. In a “credit shelter trust” (family trust) which is created to fund the unified credit amount for maximum tax advantages, it is preferable to use non-retirement assets to fund a credit shelter trust because the trustee will not have to deal with the trust accounting rules for minimum required distributions. Also the amount in the credit shelter trust would be reduced by the payments of income taxes on the IRA distributions.

In many cases, one of the first practical problems involves the division the estate assets. Suppose there is only one large IRA that can be used to fund a credit sheltered trust. Upon the decedent’s death, the trustee is required to divide the IRA into the credit shelter trust and the marital share. If the trustee withdraws the required amounts from the IRA and places the funds into the credit shelter trust, income tax would be due on the withdrawn amount and the further benefit of the tax deferred build up inside the IRA would be lost. The trustee should work with the IRA custodian to establish separate “deceased IRA” or a “trust IRA” accounts for the benefits of each separate trust. These are the only practical solutions because the trustee will have to administer separate trusts with separate tax identification numbers.

The use of trusts as IRA beneficiaries are replete with pitfalls and potential tax ramifications. Generally, using a trust as and IRA beneficiary should be avoided due to complexities of these rules. However the use of a trust as an IRA beneficiary usually works in the following situations:

2. When a subsequent marriage exists and the owner has children from a prior marriage;

3. When adult children are financially irresponsible, immature, disabled or if they have legal or debt problems;

5. When the size of the IRA is so large that ongoing professional advice is warranted as well as needed to contemplate the various scenarios.

If you are one of the approximate 135 million U.S. taxpayers who rely the advice and tax return preparation of accountants, professional tax services, and/or tax software, you better know where you stand if you rely on erroneous advice or your tax return contains reporting errors. Most taxpayers who pay for such services assume that, in return for their fee, they will receive correct and accurate tax advice, or assume they will have their tax return prepared free of errors. Despite this fact, many taxpayers find themselves in the onerous position of having to defend themselves against accuracy-related penalties imposed by the Internal Revenue Service (IRS) resulting from precisely that - incorrect tax assistance.

According to an annual tax test run by Money Magazine, only 10 out of 50 professional tax preparers were able to answer 10 basic tax questions presented to them. Of those 50, only one tax professional knew tax-exempt bonds were taxed as ordinary income. Worse yet, according a 2001 Wall Street Journal news article, the IRS reported that the results of an undercover study funded by the IRS showed that only 50% of tax law questions were answered correctly by their own advisors to tax assistance-seeking taxpayers throughout their 544 Taxpayer Assistance Center locations. Most taxpayers naively assume that if they rely on the tax advice or tax preparation of a paid tax professional, service, or software, they will be absolutely immune against any liability imposed by the IRS. This is simply not true.

The IRS will apply an accuracy-related penalty for an underpayment of tax as a result of negligence or disregard of the rules and regulations and any substantial understatement of income tax, among other things. However, a taxpayer may request an abatement of penalties from the IRS if it has been shown that there was reasonable cause for such portion and that the taxpayer acted in good faith. The determination of whether reasonable cause exists must be made on the individual facts and circumstances of each case, including, among other things: (i) the taxpayer’s efforts to assess his or her proper tax liability; (ii) the knowledge and experience of the taxpayer; (iii) a taxpayer providing his tax advisor with all relevant information necessary to prepare his return; (iv) and reliance on the advice of a tax professional on a substantive area of tax law.

To the surprise of many taxpayers, the IRS denies a large proportion of requests for penalty abatement. U.S. Tax Court case law history dictates that it is simply not enough for a taxpayer to attempt to shift the blame on their tax professional. Often, the penalties are imposed irrespective of such fact, and turns upon whether a reasonable taxpayer should have known that the tax information submitted was inaccurate, or did not take the appropriate steps to ensure the submission of accurate tax information.

That being said, taxpayers should, among other things, make sure to question any tax advice that would make a reasonable person inquiry about its accuracy. Also, be sure to provide all relevant information to your tax professional so that they can prepare your tax return accurately. Lastly, if you happen to find that your tax preparer reported inaccurate information on your tax return, keep in mind that the IRS looks favorably upon one who makes efforts to assess and report their correct tax information to the IRS. In short, before you “pass the baton” of blame based on the fact that you relied on someone else to provide you tax advice and/or prepare your tax return, make sure you’ve done everything on your end. For more information, please feel free to contact Cameron R. Monti at 847/705.9654.

The irrevocable life insurance trust was created to reduce the impact of the federal estate tax. This is possible because once the insurance policy is held by an irrevocable insurance trust, it is no longer considered part of the policyholder’s estate and thus not taxable as such. If you're married, the proceeds are not included your spouse's estate either. However, you can have provisions drafted into the trust that pay income to your spouse during his or her life, or to allow the trustee to supplement your spouse's income to maintain his or her lifestyle or to handle unexpected expenses, medical or otherwise. Please note however, if you die within three years after the policy has been transferred to the trust, the insurance proceeds are considered part of your taxable estate. Newly purchased life insurance policies that are purchased by the trust, are not subject top the three-year look-back rule.

Other benefits to transferring your insurance policy into an irrevocable life insurance trust are that the provisions are confidential because the trust does not pass through probate. Furthermore, disgruntled beneficiaries can not challenge the trust because it is not probated.

The initial transfer of an existing insurance policy to an irrevocable trust is a gift equal to the fair market value of the policy. The irrevocable insurance trust is drafted to allow the insured to contribute additional funds to the trust each year so that the trustee may make the premium payments. It is anticipated that the trustee of the trust will pay the insurance premiums on the policies owned by the trust. Basically, the grantor makes cash gifts to the insurance trust, thus enabling the trustee to have the funds to pay the insurance premiums. The grantor must continue making the required premium payments, otherwise the policy will lapse and the named beneficiaries will get nothing.

An irrevocable life insurance trust is best used, but not exclusively used, if your assets exceed the unified tax credit, which is currently 1 million dollars, but will increase to 1.5 million dollars on January 1, 2004. Therefore, in order to determine whether an irrevocable life insurance trust is appropriate, total up your assets as if you have died, including your life insurance proceeds. If you have more than 1.5 million dollars worth of assets, (per person if you are married) then your heirs will be hit by federal estate tax and an irrevocable life insurance trust may be just what your estate attorney ordered.

One last thing to remember is that although you can determine the beneficiaries of the trust when you attorney drafts it, it cannot be changed at a later date, thus the title “irrevocable life insurance trust.” So make sure you name your beneficiaries who you really want to enjoy your money.

	This newsletter is a publication of Lavelle Legal Services, Ltd. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.