Fall 2008 Newsletter

Date: Tuesday, October 07, 2008

GENERAL ASSEMBLY HONORS WILLIAMS FOR EXEMPLARY LEADERSHIP

The South Carolina General Assembly honored the Willcox Law Firm's CEO in June, with Bill 1427:

• Whereas, the members of the South Carolina General Assembly commend Reynolds Williams for his exemplary leadership and dedicated service to the State of South Carolina; and
• Whereas, Reynolds Williams' cumulative experiences in legal, financial, and business matters made him uniquely qualified to serve as the first Chairman of the Retirement System Investment Commission; and
• Whereas, Reynolds Williams was unanimously elected as Chairman on September 8, 2005 and successfully organized the Commission and staff, advocated the constitutional amendment allowing more diversity in investments in international, private equity, global fixed income securities, as well as, other alternative assets classes; and
• Whereas, Reynolds Williams has devoted significant amounts of time and effort leading the commission into being one of the premier public pension investment bodies and strengthening the investment portfolio through diversification; and
• Whereas, by his leadership and dedication, Reynolds Williams has earned the admiration and respect of his peers and colleagues, as well as, thousands of educators, police officers, firefighters, national guardsmen, and state and local employees who are members of the various retirement systems. Now, therefore,

Be it resolved by the Senate, the House of Representatives concurring:

That the members of the South Carolina General Assembly, by this resolution, recognize and commend Reynolds Williams, Chairman of the Retirement System Investment Commission, for his exemplary leadership and outstanding work to benefit the State of South Carolina and thousands of public employees and retirees.

LANDOWNER GETS SETTLEMENT FOR "TAKING"

When the government takes aim at private property to be taken for some public purpose, more often than not any resulting litigation is a contest over how much the property owner should be paid, rather than whether the exercise of the power of eminent domain was appropriate in the first place.

From the landowner's standpoint, it is important to realize that adequate compensation is not determined simply on the basis of the current use of the property. Instead, the landowner is entitled to the value of the property based on its "highest and best" use (whether that use already exists or is only in the eye of a developer), so long as such a potential use is not too speculative or otherwise foreclosed by applicable laws and regulations.

The importance to a property owner of negotiating compensation on the basis of a best-case, but realistic, development scenario for the property is illustrated by a recent case in which the owner of a vacant, 22,000-square-foot lot settled with a town for compensation in an amount that was about 27 times higher than the amount initially offered by the town.

The lot was zoned for residential use, although at the time of the condemnation action the owner had no building or development plans. Appraisers hired by the town offered an opinion that the vacant lot's best use was only as open space, or as a buffer for an abutting lot. They reasoned that compliance with the town's lot area and frontage requirements, as well as with its road standards for improving the dirt road on which the lot was located, would be so burdensome as to make any development of the property prohibitively expensive. They also indicated that extensive development costs would preclude development even if the lot was considered to have grandfathered status that would protect it from certain town requirements.

For its part, the landowner retained experts who opined that the lot was, in fact, suitable for residential purposes and should be valued as such when arriving at a compensation figure for the taking. As the town's experts had noted, there were various requirements on the books that, in theory, could be costly to comply with. However, an examination of past rulings by the town's zoning and conservation officials showed that the lot was likely to be exempted from some of the requirements. Moreover, improvement of the dirt road, which would have been an especially big-ticket item, was not likely to be required.

Both sides were necessarily looking into the future to some extent, but the landowner was able to depict a scenario for the lot that was optimistic enough to bring about a favorable monetary settlement with the town.

CYBER INSURANCE FOR BUSINESSES

Businesses have been dependent on computerized information for some time now, but it has been only relatively recently that insurance companies have devised and offered insurance policies specifically tailored to the potential losses from a variety of problems that can affect a computer system.

An early impetus for cyber insurance was anticipation in the late 1990s of losses associated with the coming of "Y2K." That concern turned out to be overblown, but the threats that have spurred cyber insurance offerings since then are real enough, including viruses, hackers, and legal injuries to others from information on a company's website. One study has found that the average annual technology- related financial loss for United States companies more than doubled just from 2006 to 2007.

Another development that prompted more cyber insurance policies was the realization, which sometimes came as a surprise to insured businesses, that general liability policies did not cover computer problems. Cyber insurance is a good idea for all of the usual reasons associated with insuring against business losses. But it also makes sense because of the particular costs associated with responding to a computer data breach, especially now that many states have adopted data breach notification laws.

This kind of postmortem after a breach could include such measures as notifying affected customers, paying for credit monitoring for those customers, replacing compromised credit or debit cards, and undertaking forensic analyses of affected databases. All in all, there are some expensive scenarios to insure against.

Categories of Losses

The losses covered by cyber insurance generally fall into two categories: first-party losses, meaning those affecting the business itself; and third-party losses, meaning incidents mainly affecting outside parties, including the customers of a business. Of course, the same underlying problem can cause both kinds of losses, such as when unauthorized access to a computer system shuts down the computer system of a company whose customers or clients rely on that system through an extranet.

A comprehensive cyber insurance policy should encompass both kinds of risks. These are the typical categories of coverage:

1. First-party business interruption, covering lost revenue experienced during downtime due to accidents or security breaches (but typically not losses due to catastrophic regional power outages);
2. First-party electronic data damage, such as the compromise of data from a virus infection;
3. First-party extortion, including the demands made by hackers;
4. Third-party network security liability, arising from compromise and misuse of data stemming from identity theft and credit-card fraud;
5. Third-party network liability in the form of court judgments obtained by persons harmed by problems originating with a business's computer system; and
6. Third-party media liability, aimed at the full range of potential liability from matter published in interactive online communications.

LLC RULING FAVORS TAXPAYERS

Anna was the mother of three children and the widow of the man who invented the heart defibrillator implant. In 1992, she created a trust for each of her daughters and gave a portion of her substantial interests in patent licenses to the trusts. In 2001, she created a limited liability company (LLC), to which she made some large transfers. She then gave a 16% interest in the LLC to each of the trusts, keeping a 52% interest to herself. Only four days later, Anna died suddenly and unexpectedly.

The IRS claimed a deficiency of millions of dollars in estate taxes. It pointed to a part of the Internal Revenue Code that provides that all property is to be included in a decedent's estate to the extent that the decedent has transferred an interest in the property while retaining for life the possession or enjoyment of, or income from, the property. There is an exception to this general rule in cases of a bona fide sale for full and adequate consideration in money, but the IRS argued that the exception did not apply in the case of Anna's estate.

In a somewhat surprising decision, given a recent trend favoring the IRS in such disputes, the United States Tax Court sided with the estate and kept the LLC assets out of the gross estate for estate tax purposes. The court ruled that the bona fide sale exception applied, notwithstanding that the LLC activities were not in the nature of a "business." It was sufficient that Anna had "legitimate and significant nontax reasons" for creating and funding the LLC, including joint management of family assets, pooling family assets to maximize investment opportunities, and providing for each of her daughters on an equal basis.

Some practical lessons for minimizing estate tax liability while using family LLCs emerge from the case of Anna's estate. They include the following: (1) document the legitimate and significant motivations, unrelated to estate taxes, for forming such an entity; (2) continue the entity after the decedent's death, to avoid the appearance of an ordinary trust; (3) if, as in Anna's case, the donor dies unexpectedly a short time after the gifts, be prepared to demonstrate that the death was unexpected; and (4) keep sufficient assets outside of the entity to cover the donor's living expenses, to avoid the possibility that the donor will treat the assets of the entity as her own. The planning, drafting, and advice associated with a family LLC entails resolution of complex issues and requires the guiding hand of a knowledgeable professional.

FEDERAL ESTATE TAX

The federal estate tax credit, currently at $2 million, is set to increase to $3.5 million in 2009. This means that in 2009 you can leave up to $3.5 million to your heirs without any federal estate tax liability.

If Congress takes no action, the federal estate tax will be repealed altogether in 2010. While this is an unlikely scenario, it does underscore the uncertainty involved in estate planning over the next few years. Make sure to meet with a professional to review your plan.

CLIENT CORNER

Community Bankshares, Inc. and First Citizens Bank and Trust Company, Inc. have announced their proposed merger. Community Bankshares (AMEX: SCB) is the parent of Community Resource Bank (formerly Florence National Bank).

Prominent South Carolina defense attorney Reese Joye died while attending a trial advocacy summer conference at Harvard University, which he had organized. Joye is an author of three books on drunken driving laws and prosecution and was a founding member and past-president of the South Carolina Association of Criminal Defense Lawyers. He founded the Joye Law Firm of North Charleston.

REVERSE MORTGAGE BASICS

A reverse mortgage is different from a second mortgage or a home equity line; it does not incur debt for the "borrower." Rather than pay the lender a monthly fixed amount, the lender pays the homeowner a monthly amount. Reverse mortgage loans are generally written for no more than 1/2 to 2/3 the value of the home, and the amount to be re-paid can never exceed its value. To qualify, at least one of the homeowners must be 62 years old, it must be the owner's primary residence, and there must be no prior liens on the property.

Reverse mortgage borrowers have special characteristics. People who grew up during the depression, as well as those who have managed to live free and clear of debt for many years, are extremely debt averse. Often the borrowers are widows whose husbands handled the family finances, but now find themselves doing it alone.

The attorneys of the Willcox Law Firm have the knowledge and the patience to navigate this new world for such clients.

IRS CLARIFIES WHEN A VACATION HOME CAN BE PART OF A LIKE-KIND EXCHANGE

The IRS has released Revenue Procedure 2008-16, which sets out a safe harbor test. If you meet the requirement of this test, then your vacation home can be eligible to be part of a "like-kind exchange" for Federal Income Tax purposes. In order to meet the safe harbor, both the property you currently own and the property you subsequently acquire must satisfy the following requirements:

• You must own the relinquished property for 24 months before the exchange and you must own the replacement property for 24 months after the exchange.
• You must rent each property to someone for fair rental value for at least 14 days in each of the two 12 month periods before and after the exchange.
• In each of the two 12 month periods before and after the exchange, your personal use of the property cannot exceed (i) 14 days or (ii) 10% of the days rented, whichever is greater.

This IRS test is a safe harbor, which means if you meet the test then the IRS will not challenge the transaction as qualifying for favorable like-kind exchange treatment. This does not mean that if you fail the test then you automatically do not qualify.

BICYCLE SAFETY

When a car or truck has a collision with a bicycle, the bicycle rider usually loses, no matter who legally had the right of way. Bicycle riders should take extra care to obey the following safety tips:

Remember: Bikes Are Vehicles, Too

Legally, bicycles traveling on a road are required to be treated in the same way as any other vehicle traveling on the road would be. This means that, as a bicyclist, you must obey the same laws as other drivers do. Do not run red lights, change lanes without signaling, or commit other infractions. If you would not do it in a car, don't do it on a bike.

Wear a Helmet

The easiest way to protect yourself is to always wear a helmet when you ride. Some jurisdictions require all riders to wear helmets, but even where it is not required, wearing an approved helmet can significantly reduce the chance of serious head injuries in the event of an accident.

Be Visible

Because bicycles are so much smaller than cars and trucks, it is important to make sure that others using the road can see you. Make sure that your bicycle has reflectors on the front and back and even on the wheels. When riding at night, wear light-colored clothing and use a light.

Be Aware

The best safety advice is to be aware of the conditions around you and be careful when riding. Always look both ways when entering a street and stay on the correct side of the street when riding. Keep a lookout for drivers who may not be looking out for you. Like other drivers, bike riders should ride defensively.