Estate Planning for "Digital Assets" or Who Reads My Emails When I Die?

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Have you thought about what happens to all the emails, pictures, contacts, messages, phone numbers, email addresses, on-line accounts and other information on your personal and work cellphones and computers after you die?  Do you want anyone to have access to these “digital assets” after you die?  If so who should have access to what?  You  need to consider these digital assets as well as your other assets when doing your estate and succession planning.

What are Digital Assets?  Digital assets include any online account that you own or any file that you store on your computer or in the cloud.  Digital assets can include your on-line banking account, your e-mail accounts, your picture and video storage sites, your social networking sites, your domain names, your games and leisure sites, your business, professional, marketing and networking sites, your frequent flier mile and other award program accounts, and all your storage and backups.   Digital assets also include all the electronic information and data on your personal and business cellphones, laptops, I-pads, computers, hardware and software.

Passwords.  Many of your digital assets are protected by usernames, passwords, and security questions.  If these digital assets are to be easily accessible to your chosen beneficiaries, you need to make sure such access information is recorded and transferred to such beneficiaries.
Need to Plan.  It is important for many reasons to carefully plan for the eventual transfer of your digital assets.   These reasons include: (1) the uncertainty of existing digital asset privacy and other laws, (2) prevention of on-line identity theft, (3) making sure the right parties receive your digital assets, and (4) making sure others do not gain access to your digital assets.

No Body of Law.  Digital assets are a new phenomena.  There is no well-developed body of law that describes the rights and obligations of executors, agents, guardians, and beneficiaries with regard to digital assets.  Very few jurisdictions have dealt with this issue.  Facebook, Twitter, Linked-In and other on-line services have their own policies for how to deal with a user’s death or incapacity, but not all such services have developed policies, and the policies that are in place may not be consistent with your personal wishes.

Prevent On-Line Theft.  Proper planning for your digital assets can prevent on-line identity thefts.  When you die or are otherwise unable to monitor the activity on your on-line accounts, thieves have an opportunity to hack your accounts, open new credit cards in your name, obtain identification cards and make purchases and take other actions in your name.

Executor Needs Access.   Giving your trusted executor access to on-line to digital and other assets would greatly improve the efficiency of the administration of your estate.   Making sure the executor knows which bills you paid on-line or by automatic checking account deduction would help ensure these bills do not go unpaid and would make it easier for the executor to pay such bills.

Transfer of Digital Assets.  Some digital assets may not have any monetary value, but many may have personal or emotional value.  You may have established on-line photo albums and accounts that preserve photos and letters. If your family and friends do not know you have these assets or how to access these assets, these photos and letters may be lost forever.  And if no effort is may to protect these digital assets, the personal and emotional value attributable to these assets may be diminished or destroyed by addition or deletion of material by spammers and hackers.

Transfer to the Right People.  You may not want all your family and friends to have access to all your digital assets.  Emails and messages are often quick off-the-cuff posts or responses.  Some of your emails or messages may contain rude, crude or hurtful jokes, stories or rants that you did not really mean or that were meant only for the recipient.  If you are not careful about who gains access to your digital assets, the wrong people may gain access.

How to Plan for Digital Assets.   The first step in planning for digital assets is to do an inventory of these assets, including usernames, passwords, and answers to “secret” questions.   The next step is to determine for each digital asset whether such asset is subject to deceased/incapacitated user provisions and whether there are ways to change or opt out of such default provisions.

Using Wills or Trusts to transfer Digital Assets.  Wills can be used to transfer digital assets, but Wills are probably not the right place to handle disposition of digital assets or to list digital asset access information because such information changes from time to time and because Wills are eventually made public.  In addition, a Will transfers ownership and control of the digital assets to named-beneficiaries immediately when the Will is probated (rather than maintaining ownership and control in the hands of a trustee).    A Trust is probably a more appropriate location to include the transfer of digital asset provisions because a Trust can be changed more easily and because it does not become part of the public record.   The use of a Trust also gives you the ability to have your digital assets maintained and controlled after your death for so long as appropriate by a trustee you name.

Storing Access Information.  While Wills and Trusts can be used to transfer digital assets, they are not the best place to store the access information.  It is advisable to prepare a separate document with all of the access information related to your digital assets.  This separate document would be a list of all of your digital assets including your on-line accounts, passwords, security questions, and answers.  This separate document could also designate who gets access to which asset, and which assets get deleted.  This separate document can be in writing, but it also could be stored electronically on  a computer data file, USB flash drive, or in a cloud.

During your lifetime you are creating a wealth of electronic information about yourself, your family and  your friends.  Some of this you may want to pass on.  Some of this you for sure do not.  If you would like to speak with me or one of our estate planning attorneys about how to handle your digital assets please give us a call at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE   THING.  PS&E is sponsoring a FREE   seminar at Dayton Country Club on Wednesday May 22 from 7am to 9 am on “Essential   Legal Documents, Planning Considerations and Legal Updates for Every   Business.”   It is not too late to register.  But you need to hurry since space is limited.  You can register by clicking on the following link Register   Now! or by contacting Jan Burden at 937-223-1130 or Jburden@pselaw.com.

Importance of Competent Professional Help

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Sometimes you get what you pay for. And sometimes you don’t. In an effort to save a few dollars, some business owners prepare legal documents themselves, or buy one-size-fits-all documents off the internet, or get a friend of a friend to do the work for cheap. The results often are not what the business owner expected.


I encountered a recent situation where a business owner wanted to prevent a former employee from competing. At the time of hire, the business owner required each employee to sign a non-compete agreement. So far so good. The problem was that the language used to describe the non-compete restricted area was not properly worded. The business owner intended to restrict the employees from competing within a 5 mile radius of the existing business location. Unfortunately, the language in the non-compete agreement which defined the restricted area was based on a  5 mile circumference rather than a 5 mile radius. This improper wording had a dramatic effect. The restricted area is approximately 78.5 square miles if the restricted area is based on a radius of 5 miles from the existing location.   But the restricted area is less than 2 square miles if the restricted area is based on a 5 mile circumference around the existing location. This is a huge difference. This drafting fiasco could have been avoided.


Please call or email me or Matt Stokely if you would like us to review or help you draft a non-competition or non-solicitation agreement at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE THING.  The IRS has issued a press release (IR 2013-49) reminding tax-exempt organizations to file their Form 990 annual return by May 15, 2013 or risk having their tax-exempt status revoked.  Contact Jeff Senney at 937-223-1130 or Jsenney@pselaw.com if you would like a copy of IR 2013-49 or have any questions about establishing a tax-exempt organization or filing the annual return.

Internet Sales Tax Legislation

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Over the years, states have attempted to impose sales tax collection responsibility on out-of-state retailers.   As laid out in numerous court cases over the years, states cannot impose sales tax collection responsibility on a retailer unless the retailer has “nexus” with the state.   For this purpose, nexus has meant means some physical contact or connection between the retailer and the state such as having business assets, employees, or offices in the state.  In the past, merely contacting customers by phone, mail, internet or traveling salesmen has not been enough to impose sales tax collection responsibilities.   This worked to the advantage of out-of-state retailers who did not have to charge and collect sales tax, and to the disadvantage of traditional brick and mortar retailers located within the taxing state.  Big retailers with stores all over the country like Wal-Mart, Best Buy and Target have been required to collect sales taxes when they sell products over the Internet. But online-only retailers like eBay and Amazon have not been required to collect sales taxes except in states where they have offices, distribution centers or other physical presence.


But all that is changing.  The US Senate has sided with traditional retailers and financially strapped state and local governments by passing legislation that would subject online-shopping to state sales tax.


Internet giant eBay is leading the fight against the legislation, along with lawmakers from states with no sales tax and certain anti-tax groups. The bill's opponents say it would put an expensive obligation on small business because they are not equipped to collect and remit sales tax to many different state and local governments at many different rates.   Under the legislation, businesses with less than $1 million in online sales would be exempt.   But eBay wants to exempt businesses with up to $10 million in sales or fewer than 50 employees.


Many governors, both Republicans and Democrats, have been lobbying the federal government for many years for the authority to collect sales tax from online retailers.  While under most state laws the consumers have an obligation to pay a “use” tax if the retailer does not collect a sales tax on their purchase, most consumers do not comply.  And it is not generally cost-effective for the states to chase individual consumers for use tax on small purchases.


This issue continues to grow as more people make purchases online.  Last year, Internet sales in the U.S. totaled over $226 billion according to government estimates.  States lost a total of $23 billion last year because they could not collect taxes from out-of-state retailers.  Supporters say the bill makes it relatively simple for Internet-only retailers to comply.  States are required to provide free computer software to help retailers calculate sales taxes, based on where shoppers live. States must also establish a single organization to receive the Internet sales tax revenue, so retailers don't have to send it to individual counties or cities.

Give me  a call or email if you want to talk about the new legislation or have any sales or use tax questions at Jsenney@pselaw.com or 937-223-1130.



AND ONE MORE THING.  Let’s give a hand to Tony Desjardins and the gang at UDECX, LLC who  won the prestigious Soin Award for Innovation at the recent 2013 Dayton Chamber of Commerce Annual Meeting.   UDECX has developed and is marketing the only modular, portable, and completely DIY patio decking product on the market today.  If you are interested in learning more about UDECX, check out their website.

IRS Voluntary Compliance Program - Correcting Plan Failures

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In order for a retirement plan to be treated as a qualified retirement plan and enjoy the benefits of such status (contributions deductible to employer, employees not taxable on contributions until distributed, employees not taxable on appreciation of investments), the plan must meet all of the requirements set forth in the Internal Revenue Code.  Some of these requirements relate to the form of the plan.  That is, the plan must contain certain provisions mandated by the IRC.  Other requirements related to the operation of the plan.  That is, the plan must operate in accordance with the terms of the plan and with the IRC.  Failure to operate a plan in accordance with terms and the IRC could lead to the plan being disqualified.  In this event all of the plan contributions could be considered as taxable income to the plan participants.

Operating and maintaining a qualified retirement plan can be quite complex.  It is not unusual for a plan to suffer an operational failure.  Some of these failures are minor and infrequent.  Other failures may be more serious or egregious.   To encourage employers to correct plan failures and give employers comfort that the correction will be acceptable to the IRS, the IRS has a program (set forth in Revenue Procedure 2013-12) that outlines how certain plan failures can be corrected.

Under Revenue Procedure 2013-12, depending on the type of plan failure involved, there are three possible ways that the plan failure might be corrected. These correction methods include:

Self-correction (SCP). A Plan Sponsor that has established compliance practices and procedures may, at any time without paying any fee or sanction, correct insignificant Operational Failures under a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan. For a SEP or SIMPLE IRA Plan, however, SCP is available only if the SEP or SIMPLE IRA Plan is established and maintained on a document approved by the Service. In the case of a Qualified Plan that is the subject of a favorable determination letter from the Service or in the case of a 403(b) Plan, the Plan Sponsor generally may correct even significant Operational Failures without payment of any fee or sanction if the correction is made within certain time periods.

Voluntary correction with Service approval (VCP). A Plan Sponsor, at any time before audit, may pay a limited fee and receive the Service’s approval for correction of a Qualified Plan, 403(b) Plan, SEP, or SIMPLE IRA Plan failure. Under VCP, there are special procedures for Anonymous Submissions and group submissions.

Correction on audit (Audit CAP). If a failure (other than a failure corrected through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and pay a sanction. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.

Whether a plan failure may be self-corrected, or corrected under the VCP program or must be corrected under the Audit CAP program depends on the type of failure, the frequency and the significance of the failure, and whether the failure was self-reported or discovered on audit.  The more often the failure, the more participants involved, the more plan years involved, and discovery of the error on audit reduce the chances the failure can be self-corrected (or even fixed under the VCP program).

If your retirement plan has suffered an operational failure, call or email Jeff Senney to discuss how the plan can be corrected at Jsenney@pselaw.com or 937-223-1130.



AND ONE MORE THING.  A frequent plan failure involves plan loans not being administered in compliance with the terms of the plan or the IRC.   The IRS does not currently recognize self-correction as a permitted correction method for a plan loan failure.  As a result, a plan loan failure must be corrected under the IRS’s VCP.  If the plan loan failure is not so corrected, the IRS requires the loan amount to be treated as a taxable distribution and reported on IRS Form 1099-R.  The IRS also requires the employer to pay the applicable income tax withholding related to such deemed distribution.   There might be other applicable penalties as well.  Call Jeff Senney to discuss any questions you have about correcting retirement plan operating failures at 937-223-1130 or Jsenney@pselaw.com.

Requirements of a Tax Free Corporate Division

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If a corporate split-up transaction does not meet the requirements of IRC section 355, the transfer of assets by the distributing corporation is treated as a taxable sale, and the distribution of the stock of the controlled corporation is treated as a taxable dividend.  In order for a distribution of stock of a controlled corporation to qualify under IRC section 355 as a tax-free transaction, the following requirements must be met:

(1)   The distributing corporation must control the corporation whose stock it distributes (“controlled corporation”) immediately before the distribution.  For purposes of these rules, control means ownership of (a) stock possessing at least 80% of the combined voting power of all classes of stock entitled to vote, and (b) 80% of the shares of each other class of the corporation's stock.


(2)  The distributing corporation must distribute all the stock of the controlled corporation it held immediately before the distribution.  However, if it can show that tax avoidance is not a principal purpose for retaining part of the stock of the controlled corporation, the distribution will be tax-free so long as a controlling interest in the controlled corporation's stock is distributed.

(3)  The transaction must not be used principally as a device for distributing the earnings and profits of either the distributing corporation or the controlled corporation.


(4)  The active trade or business requirement of IRC section 355(b) must be satisfied by both the distributing corporation and the controlled corporation.


(5)  There must be a corporate business purpose for the distribution.  Some examples of business purpose include: cost savings, risk reduction, resolution of management or other problems, providing equity interests to key employees, facilitating credit or borrowing, preparing for security offerings, preparing for transactions with competitors, getting ready for purchase of the distributing corporation, facilitating a purchase or acquisition  by the distributing corporation or the controlled corporation.


(6)  The distributing corporation must distribute only stock or securities of the controlled corporation to a shareholder in exchange for his stock.   However, if the other requirements listed above are met, and other property is distributed, the distribution will be tax-free except to the extent of the other property distributed


(7) The distribution or series of distributions is not part of a transaction after which either the distributing corporation or a controlled corporation is a disqualified investment corporation and a person holds immediately after the transaction a 50% or greater interest in any disqualified investment corporation that they did not hold immediately before the transaction.

If any one of the above requirements is not met, the transaction will fail to qualify as a tax-free reorganization, and the distributing corporation and/or the shareholders will be subject to income tax.  Call or email me at 937-223-1130 or Jsenney@pselaw.com if you have any questions about how to properly structure a tax-free corporate division or other reorganization transaction.


AND ONE MORE THING.  The local chapter of American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley. The event will take place Saturday, April 27, 2013 with the theme, "Providing Hope Like a Bridge Over Troubled Water."   The event is being run like a fashion show.  Jeff Senney is participating/competing in the show.   You can donate/vote for Jeff as “top model” by clicking on the donate link. Thanks for your support for this great cause

Considering a Spin-Off?

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Many corporations operate more than a single business.  Over time, many corporations branch off into different businesses. There is no law that prohibits a corporation from operating multiple different businesses operating inside the single corporate shell.  But doing so may not be wise.


Operating multiple businesses inside a single corporate shell puts the assets of a good business at risk to pay the debts of a bad business.


If you have employees that work on only one of the businesses, and you want to give these employees compensation or incentives based on the results of operations of such business, it is somewhat easier to accomplish if the businesses are run in separate corporate shells.   Or if in the future you think you might want to bring in family members to own/operate one but not all of the businesses it is also preferable to have the businesses run in separate corporate shells.


In order to split-up a corporation into two or more separate businesses, the first step is generally to drop the assets and liabilities that comprise each business into a separate subsidiary corporation.  The second step is to distribute the stock of the subsidiary corporation to the shareholders.  This type of reorganization transaction is sometimes referred to as a Type D divisive reorganization.    In order for such a split-up to be done on a tax-free basis, certain requirements must be met.  One of these requirements is that the businesses operated by the original corporation and the new corporations must have been active businesses for at least the last 5 years.  Another requirement is that immediately after the distribution, the new corporations must be controlled by one or more of the shareholders of the original corporation.   There are other requirements that also need to be met.


Doing a tax-free split up transaction is quite complex and should not be attempted without the aid of a competent tax professional.  Please call or email me at Jsenney@pselaw.com or 937-223-1130 to discuss any questions or comments you may have concerning a tax-free split up transaction.


AND ONE MORE THING.   Non-corporate taxpayers are permitted to make an election to exclude income resulting from discharge of real property business debt and reduce the basis of depreciable real property.   The IRS recently approved a request by a 50% partner in an LLC treated as partnership to grant the partner a 45-day extension to file an amended return to make such election.   If you need assistance with filing an election to exclude discharge of debt income, or in seeking IRS approval for an extension to file such election, please call me at 937-223-1130 or Jsenney@pselaw.com.

Succession Planning

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It is never too early to start thinking about succession planning.  All business owners eventually reach a point where they want to retire, they want to slow down, they want to try their hand at something new, they want to give the younger generation a chance to show their stuff or they just want to cash out.  In every case, it is a smoother and generally more profitable transition if the owners have taken the time to plan and think through what is required to successfully transition their business.


Succession planning may involve sale of the business.  But to whom?  To employees?  To family?  To suppliers?  To customers?  To competitors?  And for how much?  Is there a reasonable methodology for setting the value of the business?


Succession planning may involve gifts to spouse, children and grandchildren.  But are they competent to run the business?  Is the management staff competent and loyal enough to work with inexperienced family members while they come up to speed?


Succession planning may involve stock options or deferred compensation or other bonus arrangements for key employees designed to keep them on board after the owners have moved on.  Do you have a group of employees who have the experience and skill to run the business after you are gone?  Have you given them the ownership and/or compensation incentives needed to win their loyalty and keep them on board?


Succession planning may involve employee stock ownership plans ("ESOPs").  By using  a ESOP vehicle, business owners may be able to create a market for their stock where no market otherwise exists, and may be able to sell their stock to such ESOP in a tax-advantaged away.  But ESOPs are somewhat complicated and costly to set-up and maintain, and you need to consider whether the possible upfront tax savings are worth the cost and administrative complexities inherent in such arrangements.


There are many other issues related to succession planning that need to be considered including valuation of the company stock, use of valuation discounts, use of stock redemption or buy-sell agreements, use of employee non-compete agreements, training of future management, etc.  More about succession planning issues will follow in future blogs.  Please give me a call if you want to discuss succession planning and how we can help you.  Jsenney@pselaw.com or 937-223-1130.


AND ONE MORE THING.   The American Red Cross is an important part of our national disaster recovery system.  In light of the recent natural disasters and the terrorist attacks our country has endured, the importance of supporting Red Cross and its missions cannot be overstated.  Our local chapter of American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley. The event will take place Saturday, April 27, 2013 with the theme, "Providing Hope Like a Bridge Over Troubled Water."    You can  donate/vote by clicking on the donate link. Thanks for your support for this great cause.