Estate Planning:
WHAT IF ESTATE TAXES ARE REPEALED?

As you may know, recently the House and Senate passed legislation that would effectively repeal (over a period of time) the estate and gift tax laws. President Clinton vetoed the act and, as such, a potential repeal of the estate tax laws is dead for the current session. Republican congressmen and senators alike vow to re-introduce the legislation at the next session.

The question arises - how does my current estate planning, or any future estate planning, change under any such repeal?

First, estate planning for a testamentary trust, i.e., a trust that comes into existence after one's death, is still necessary. For example, if you currently have minor children, you would not want to leave them the bounty of your assets at a young age. Therefore, some post-mortem trust structure is necessary.

Moreover, the current scheme of A/B wills, or dividing one's estate into a "family trust" and a "marital portion," may still continue to be used to create some asset protection barriers for the surviving spouse.

Secondly, it seems that lifetime giving of gifts for exclusively non-tax motives, such as benefiting family members or charities, will not be changed. However, lifetime transfers designed to take advantage of discounting, removing future growth from estates and allowing for the second generation to pay income taxes on those gifts, may all but disappear with the repeal of the gift tax.

Third, there may be additional transfers of common stock in small businesses to family members. Under the current scenario, while parents would like to transfer common stock to their children in small businesses, they usually desire to maintain some voting control over the business. If such power is retained by the grantors/parents, it generally disqualifies the transfer for estate tax purposes and has no tax benefit. Upon the repeal of the estate tax laws, parents would be able to transfer the common stock interests of the business to children, thus shifting many of the income tax liabilities to the children and still retain voting control over the business without concern.

Lastly, it seems that the purchase of second-to-die life insurance policies created through irrevocable life insurance trusts may die upon the repeal of the estate tax. However, life insurance in general, because of its place in non-tax planning for your own families, will not die. Further, whole-life and universal-life policies sold to complement an investment portfolio will continue to be sold and purchased as investment vehicles.

A rather new and developing instrument in estate planning is the payback trust. Payback trusts are designed to allow disabled people to receive government benefits while protecting their trial award, settlement or inheritance. This trust is specially designed for use by disabled persons who have received funds through a personal injury or medical malpractice award, or by inheritance, but wish to continue receiving government benefits. Assuming disabled persons are eligible for government benefits, which is normally based on a need basis, they can continue to receive those benefits even though they have a multimillion dollar settlement or jury award in their name. Essentially, proceeds from the settlement, verdict or inheritance are placed in the trust and, for purposes of obtaining government aid, are not considered income to the disabled person. Therefore, the disabled person can continue to receive government aid and can supplement that aid with funds from the payback trust.

However, the payback trust, living up to its name, allows the government to recover funds provided to a disabled person throughout his or her life upon that disabled person's death. The government pays benefits to the person and creates a lien which is payable upon the death of the disabled person. The trust will "pay back" the government with whatever funds it has left at the time of the beneficiary's death, up to the full amount of the lien.

An interesting issue regarding payback trusts is whether a trust can be used to shield proceeds obtained in a lawsuit or inheritance from a preexisting government lien. The answer to this question is an emphatic no. Essentially, any lien created before the disabled person acquires the funds must be paid off prior to putting the remaining funds into the payback trust.

The benefits of a payback trust are easy to understand in that the disabled person can take advantage of government assistance while allowing the trustee of the payback trust to invest the full amount of funds acquired via trial award, settlement or inheritance. In this manner, the disabled person can take full advantage of the market and invest the award instead of spending it on medical needs. Income from the payback trust can supplement government assistance and allow the disabled person to have money available for comforts and benefits which would otherwise be spent on medical necessities.

The need for proper estate planning increases with an individual's wealth as well as an increase in the size of one's family that consists of minors. However, for some individuals, an effective alternative to probating your estate would be implementation of a small estate affidavit. A small estate affidavit allows the heirs of a decedent to avoid the cost of probating the decedent's estate provided the decedent's personal estate is valued at less than $50,000.

A small estate affidavit is a tool for the heirs to step into the shoes of the decedent to transact business with his creditors and agents so as to manage the decedent's assets, pursuant to either his will or, if no will is left, the Illinois descent and distribution rules. A small estate affidavit cannot be used for real estate or appointment of a guardian of minors. The small estate affidavit provides the heirs a cost-effective alternative of settling a decedent's estate rather than going through probate. However, a small estate affidavit does not shorten the two-year statute of limitations for creditors to collect on their accounts against the decedent's estate, which must be paid prior to distribution to heirs. Rather, the small estate affidavit merely allows the heirs to avoid certain costs related to opening, maintaining and closing a probate estate.

The small estate affidavit in combination with a will and titling certain assets in joint tenancy may allow an individual with no minor children to ease the cost related to administering the decedent's estate.

Bankruptcy:
A SALE IS A SALE IS A SALE OR IS IT?

There is an on-going debate in Illinois as to when a Chapter 13 debtor loses his rights to cure a mortgage default with regards to his residence. Pursuant to 11 U.S.C. ' 1322(c)(1), a debtor may cure a default with respect to a lien on a debtor's principal residence "until such residence is sold at a foreclosure sale that is conducted in accordance with the applicable non-bankruptcy law." The issue, which may seem simple at first glance, is: what constitutes a fore-closure sale conducted in accordance with Illinois law? The dispute centers around the technical procedure of foreclosing on a debtor's residence.

In most cases, when a debtor falls behind on his mortgage payments, the mortgagee will file a complaint to foreclose on the debtor's property. The mortgage company will then move for judgment of foreclosure and sale. Once a judgment is entered, and after observing various notice requirements, the mortgage company can put the house up for sale at a judicial sale, normally conducted by the sheriff of the county in which the property is located. However, once the property is "sold" at a judicial sale, the court must then conduct a hearing to confirm the sale, which normally occurs a couple of weeks after the sale.

Recently, there has been litigation initiated by certain mortgage companies to cut off a debtor's right to cure a mortgage default under Chapter 13 at the judicial sale instead of setting the deadline at the court's confirmation of said sale. This issue is particularly important when a Chapter 13 debtor allows his property to be sold at a foreclosure sale but wants to cure the default in a Chapter 13 bankruptcy before that sale is confirmed by the court. Clearly the most advantageous reading of the law for the debtor is that the sale is not complete until the court confirms the sale. Conversely, mortgage companies will argue that the property is sold at the foreclosure sale and therefore the debtor cannot file a Chapter 13 bankruptcy in hopes of curing a mortgage default subsequent to the foreclosure sale.

Case law in Illinois on this issue is split. Mortgage companies rely on In re Beaty, 116 B.R. 112 (N.D. Ill. 1990), for the proposition that a Chapter 13 debtor cannot cure a mortgage default until after the judicial sale of property, even though the sale was not confirmed before the Chapter 13 filing. The Beaty court found that the property was sold at the judicial sale and thereby precludes a debtor from exercising rights to cure a default because he no longer had the right to title and possession of the property. However, more recent decisions have come to opposite conclusions. In McEwan v. Federal National Mortgage Association, 194 B.R. 594/595-96 (N.D. Ill. 1996), the court held that a judicial sale is not complete until it has been approved by the trial court. Trial courts have broad discretion in approving or disapproving sales made at their direction. The court held that the highest bid received by a sheriff at a judicial sale is "merely an irrevocable offer to purchase the property and acceptance of the offer takes place when the court confirms the sale". Id. The court found that until the trial court confirms the foreclosure sale proceedings, there is not a true sale in the legal sense.

The McEwan decision was reinforced by Crawford v. First Nationwide Mortgage Corp., 217 B.R. 558 (N.D. Ill. 1998), where the court held that under Illinois law, a debtor's residence is not "sold at a foreclosure sale" so as to terminate the debtor's right to cure a default under the cure provisions of Chapter 13, until such time as the foreclosure has been confirmed.

The only thing that is certain with respect to this issue is that there are compelling arguments on both sides. The Supreme Court has not issued a decision on this particular issue and the statute only refers to a foreclosure sale without specifically defining what constitutes a foreclosure sale. Clearly, the safest alternative for a Chapter 13 debtor is to file his Chapter 13 bankruptcy prior to the foreclosure sale on his residence. In acting in a timely and prudent manner, the debtor will avoid any litigation with respect to the foreclosure sale issue. However, attorneys at Lavelle Legal Services are presently litigating this issue and will continue to litigate this issue in hopes of setting a firm precedent that is favorable to debtors whereby the final date that a Chapter 13 debtor may file his petition will be the date on which the court confirms the foreclosure sale.

Intellectual Property:
TRADEMARKS AND COPYRIGHTS OF THE INTERNET AGE

Computers have had an impact on virtually every aspect of life. They have revolutionized the way people and businesses communicate, the way individuals work, and how companies conduct business. Not only has the computer made it easier to conduct business, it has also made it easier to pirate intellectual property. The explosion of the Internet and continuing evolution of how businesses operate have created many different issues as to how to protect intellectual property.

Trademarks: A trademark is a name, symbol, or design with which a business differentiates its products and services from those of its competitors. Without trademark protection, any company would be able to produce goods, then place a famous mark on the side of the product and take advantage of the mark's popularity. As businesses evolve from traditional to include e-commerce, it becomes increasingly important to protect trademarks, for it is by and through trademarks and their corresponding domain names that businesses differentiate themselves from others on the Internet.

Under general trademark law, the old rule of first in time generally applies to trademark rights. The first business or entity to use in commerce a mark to differentiate its goods is the legal owner of such mark and can prevent others from using such mark. Trademark law is protected under common law and therefore no formal registration of a mark is required in order to have trademark protection. However, it is strongly recommended to register a trademark with the United States Patent and Trademark Office as well as the appropriate state agency. Registrations allow a trademark owner to recover attorney fees as well as statutory damages from one liable for infringement. Furthermore, registration assists a trademark owner with potential evidence to problems that may arise should one be required to defend its trademark rights in a court of law.

Cyber-Squatting: Cyber-squatting is the practice of registering as a domain name the trademark of another with the motivation of reselling such domain name to the trademark owner at a profit. In addition to registering trademarks, cyber-squatters have also been known to register as domain names the names of famous people.

The best strategy for protecting yourself from cyber-squatting is to register all trademarks as domain names as soon as possible. Many times, however, a trademark owner finds that it is too late to register its mark as a domain name. In such circumstances, a trademark owner has a few options.

First of all, a trademark owner may initiate dispute resolution procedures before the Internet Corporation for Assigned Names and Numbers ("ICANN"), the entity created by the United States Department of Commerce to oversee the registration of domain names. As an alternative, a trademark owner may commence an action in federal court to resolve a domain name dispute. A trademark owner may bring a traditional trademark infringement suit and/or a claim for violation of the Federal Trademark Dilution Act.

Recently, Congress enacted the Anti-Cyber-Squatting Act to give trademark owners a more effective tool against cyber-squatting. The Anti-Cyber-Squatting Act prohibits one who, in bad faith, registers a domain name that is identical or confusingly similar to a distinctive trademark or service mark. Under the Anti-Cyber-Squatting Act, damages may be awarded ranging from $1,000 to $100,000 per domain name. The statute also authorized the forfeiture of a domain name registration.

Meta-Tags: Whenever one uses the Internet, often they will conduct a search using a search engine. Usually they will initiate the search by typing in a few words related to the particular topic for which they are searching. Search engines then will conduct a search of all web sites searching for the particular terms input by the user. A meta-tag is an invisible, machine readable code contained on a web site which is used by search engines to locate, categorize and index web sites. Sometimes, a web site operator may use a trademark of another as a meta-tag for its web site.

Courts have generally held that such use of another trademark as a meta-tag for which the site has no relationship to the trademark constitutes trademark infringement where the purpose of the use is to draw activity to the web site. On the other hand, the use of another trademark to identify products bearing the marks that can be purchased at the web site or as any other use that constitutes a "fair use of another's person's trademark" does not constitute trademark infringement.

Copyrights: A copyright is the protection of works of artists and authors giving them the exclusive right to publish their works or determine who may so publish. Generally, copyright laws protect original acts of authorship, expressions of ideas that have been reduced to fixed, readable forms, such as books, musical recordings, movies, computer programs, drawings, etc. Works created after January 1, 1978 are automatically protected from the moment of their creation for the life of the author, plus 70 years after his/her death.

Naturally, the Internet has become an ideal forum for transmitting various works of authorship. This has created numerous issues with respect to copyright infringement. Furthermore, it raises many interesting issues such as who is responsible for the copyright infringement committed over the Internet.

The Copyright Act imposes liability for violation of the copyright holder's right to reproduce, distribute, modify or publicly perform or display such work. It is not a defense to copyright infringement that you were unaware of the copyright status. Liability is absolute. The Copyright Act may also impose liability for third parties. A party who has the right and ability to control certain conduct and has a financial interest in such conduct may be vicariously liable for copyright infringement. Contributory infringement may be present if one aids or assists another in copyright infringement, such as one who provides a bulletin board. With use of the Internet, now the sender or recipient of copyrighted materials may be considered to be a direct infringer, such as an Internet service provider.

Congress has recently amended the Copyright Act to address some of these issues. The new Copyright Act now provides a safe harbor for Internet service providers to protect themselves from claims of vicarious or contributory copyright infringement. The amended Copyright Act also provides protection to Internet service providers who allow other parties to store material on their system.

Conclusions: As the business world continues to evolve in conjunction with the computer age and the Internet, old statutes and common law may not directly address the protection of legal rights. Businesses who have substantial value in intellectual property must act with caution and take action in order to protect their interests from theft. Such action is even more pressing in today's age of the Internet.

Employee Benefits Litigation:
DEFENDING UNEMPLOYMENT COMPENSATION CLAIMS

Throughout the life of any business, employees will come and go. Many employees will voluntarily leave a business to work for another company and on good terms with your business. On the other hand, it is occasionally necessary to end a relationship with an employee which, for whatever reason, is not working out. In such a situation, the departing employee may file a claim for unemployment benefits with the Illinois Department of Employment Security.

Eligibility: Pursuant to the Illinois Unemployment Insurance Act ("Act"), an unemployed individual shall be eligible to receive unemployment benefits with respect to any week if the departing employee has registered for work and reported to the Director of Employment Security, has made a claim for benefits with respect to such week, and such departing employee is able and available for work. Furthermore, in order for the Department of Employment Security to charge the employer, the departing employee must have been employed by the employer for 30 days. In addition, a departing employee is ineligible, however, if termination is due to misconduct, a felony or theft, refusal of work, or voluntarily leaving.

Illinois courts, considering the issue of misconduct, have held that unreasonable and improper course of conduct from which could be imputed lack of proper regard for employer's interest constitutes misconduct under the Act. Examples would include disobeying orders, commission of a felony, use of abusive language, a deliberate violation of employer's rules, disregard of standards of behavior an employer has a right to expect, sleeping on the job, harm to other employees, fighting, intoxication, and/or theft.

The Act also provides a defense to an employer where the departing employee voluntarily quit his position without good cause, attributable to the employer. In other words, if the employee quit due to certain conduct of the employer, then the employee would be eligible, provided all other requirements are met. Examples of good cause would include harassment by the employer or other employees, health concerns in connection with the position which are unable to be remedied, and a substantial unilateral change in employment.

Building a Case: An employer may have a valid defense to a claim by a departing employee for unemployment benefits. However, as with any type of litigation, you must be able to prove your defense. The testimony of the supervisor over the departing employee will always be required. That alone, however, may not necessarily be sufficient. It is therefore, advisable to support your testimony with documentation.
The type of documentation that is prepared will vary depending on the nature of the business. Such evidence may include performance results, annual reviews, and variance evaluations. There should also be a regular procedure in place whereby the superiors will prepare a report on the performance of such employees. Such evaluation should be performed at least annually.

Finally, it is crucial that the circumstances surrounding the decision to discharge the employee are clearly documented. If there is one single incident which prompted the termination of the employee, the parties witnessing the incident should each prepare a written description of the events. Furthermore, the supervisor making the decision should also prepare written documentation memorializing the decision and the grounds supporting such decision.

Procedure: It cannot be overemphasized that the employer carefully observe all deadlines in filing his protest with the IDES. When a departing employee files a claim with the Illinois Department of Employment Security ("IDES"), notice will be given to the employer. The employer then shall have 30 days with which to object to the claim by filing a written protest setting forth the material facts in support of the protest. If the protest is not filed in a timely manner, by operation of law, the employer does not have standing with which to protest the employee's eligibility. In such circumstances, regardless of the circumstances surrounding the discharge of the employee, IDES will be limited in its ability to consider the circumstances surrounding such discharge and may ultimately award benefits even if the employee is not eligible.

Conclusion: Most business will hire at least some employees to perform services for it. Over the life of the business, several different employees will come in and out of the company's doors. Businesses can take fairly easy steps to provide it with protection for escalating unemployment insurance contributions.

Real Estate:
STRIPPING, FLIPPING AND PACKING - NEFARIOUS ACTS OF THE PREDATORY LENDER

In 1993 there were 131 mortgage foreclosures in the Chicago area. In 1999, 4,958 homes were foreclosed upon by lenders in the Chicagoland area. While deceptive practices have been around a long time, home equity fraud, or loans initiated by lenders that know or have good reason to know the borrowers can never repay the loan, is one of the most egregious forms of fraud. In addition to losing their savings and their money, which is typical in financial fraud, victims of home equity fraud lose their homes. Lenders who make such loans, known as predatory lenders, prey on the unknowledgeable, elderly, and individuals desperate for a quick fix to a financial problem. It seems that a number of Chicago area foreclosures can be attributable to certain "predatory practices."

Certain acts, done in conjunction with the true deception, or intent to defraud, could be considered "predatory lending." Be on notice of the following practices when done with the intent to defraud:

Stripping. Stripping is the act of a predatory lender who fraudulently or deceptively strips away the equity in a house by making loans requiring a monthly payment that they know, or have reason to know, the borrower can never maintain on a monthly basis. Remember, loans are made on two premises: (1) that there is sufficient collateral; and (2) that the borrower has an ability to pay. However, when the equity in the home is excessive, predatory lenders can often push through marginal repayment ratios without concern. The extra cash received from the refinance that caused the stripping, if any exists, is used to pay off other debts of the borrower, family members, or oftentimes is given to the borrowers with the instructions, "take a vacation B you deserve it," with the lender knowing very well that the home will be in foreclosure within 12 months. In some cases, the equity in the home is eroded by excessive lending fees and costs. However, a borrower, being fully disclosed of the results of the refinance, and accepting a benefit from the refinance, would be hard pressed to prove fraud in such cases.

Flipping. Some unscrupulous lenders take the process a step further and develop an ongoing revenue stream out of "flipping" their original loans into a series of subsequent refinances. With every flip, the mortgage balance goes up (which pays for the lender's fees for the refinance) and the monthly payments stay approximately the same. These flipping techniques actually increase borrower debt rather than reduce the debt. Again, if the borrowers continue to derive a material tangible benefit from the refinancing, and they have been made aware of the decrease in home equity, then probably no fraud exists.

Packing. Occasionally, predatory lenders fraudulently "pack" charges for life insurance and added services to the new mortgages. Many of these policies are unnecessary or designed to be in default at the closing, thus never obligating the insurance company to pay the underlying policies on which the borrower is purchasing. With all these "ups and extras" additional equity is stripped from the property, all the costs of which are rolled into the mortgage itself, and paid for by the borrower over of the life of the loan. Full disclosure is the key. If the borrower knows about these fair costs, and understands the impact of these costs, no fraud exists.

Don't confuse predatory lending with subprime lending. Subprime lending is a necessary and legitimate needed source of mortgage lending for families with less than perfect credit ratings. Subprime lending may charge 1 to 3 (and sometimes more) percentage points above the best available rate in the market to individuals who may have experienced a temporary loss of employment, unexpected hospital costs, etc., which make it impossible for them to pay their bills on time, that ultimately flow through to their credit report. In these cases, highly professional lenders provide mortgage money to individuals at rates of 9% (and higher) to pay down credit card debt that may be pending at 21%, or to purchase a necessary automobile needed for work, or provide necessary funding for unexpected expenses. Predatory lending, and the pending legislation addressed at curtailing the illegal conduct articulated in this article, should not curtail the legitimate subprime lending market.

Property Taxes:
RISING HOME PRICES CAN MEAN RISING TAX BILLS

With the boom in the real estate market over the past few years, home owners have enjoyed seeing the value of their property increase. However, with this increase in the market value comes the possibility of dramatically increased property taxes as the result of the assessor also revaluing your property every three years.Accordingly, it is important to carefully review the proposed assessment sent out by the assessor and object, if you believe it is too high, within the time period indicated on the notice to ensure that you do not pay more than your fair share.

To determine if your residential property is properly valued in the proposed assessment, you should take the proposed assessed valuation and if you reside in Cook County divide it by .16 (outside Cook County, divide it by .33) and that results in what the assessor believes is the fair-market value of your property. If this value is below what you think your property is worth, it is probably not worthwhile to contest unless if properties similar to yours are assessed far below yours. If you believe your fair-market value is significantly below what the assessor has determined, you should file a complaint with the Assessor's Office supported by pictures of your property, as well as pictures of the comparables that are assessed far below yours and, if possible, obtain a letter from a realtor stating what they think your property is worth.

The work involved in contesting the taxes may seem somewhat time consuming. However, the possible benefit of a successful complaint would be recognized not only in the current tax year but the next two years and possibly the subsequent years beyond that as the assessor would be more prone to increase his assessment based upon the prior triennial assessment. Thus, the effect of a successful complaint can reach beyond just the current year's tax bill.

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.