sml perspectives | matters of law as they relate to you | volume one 2011

Boomers& Beyond

Age Discriminati on: A New Workplace Awareness

The Importance of Business Succession Planning

Estate Planning Tips: Basics to Sophisti cated Techniques

Taking the Fear Out of Choosing a Nursing Home

BUSINESS LITIGATION:Arbitrati on: Always a Great Idea! Or is it?

HEALTH CARE:Non-Profi t Hospitals and Joint Real Estate Ventures: The Pitf alls of Choosinga Business Enti ty

LABOR & EMPLOYMENT:The Top 10 Mistakes Employers Make that can lead to litigation

perspectivesMatt ers of Law as They Relate to You

VOLUME ONE | 2011

CORPORATE | COMMERCIAL REAL ESTATE | HEALTH CARE LABOR & EMPLOYMENT | LITIGATION

SML

A Smith Moore Leatherwood Publicati on

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In considering your best options...

• Alternative Dispute Resolution (2)• Antitrust Law (4)• Appellate Law (3)• Banking Law (1)• Bankruptcy and

Creditor-Debtor Rights Law (1)• Bet-the-Company Litigation (5)• Commercial Litigation (9)• Construction Law (2)• Corporate Law (5)• Employee Benefi ts Law (1) • Environmental Law (2)• Family Law (1)• First Amendment Law (2)• Franchise Law (1)• Health Care Law (6)• Immigration Law (1)• Insurance Law (3)

• Intellectual Property Law (1)• International Trade and Finance Law (1)• Labor and Employment Law (4)• Land Use & Zoning Law (6)• Legal Malpractice Law (1) • Mass Tort Litigation (1)• Medical Malpractice Law (2)• Mergers & Acquisitions Law (1)• Non-Profi t-Charities Law (1)• Personal Injury Litigation (8)• Product Liability Litigation (3)• Professional Malpractice Law (1)• Real Estate Law (8)• Securities Law (1)• Tax Law (4)• Trusts and Estates (3)• Workers’ Compensation Law (2)

ATLANTA 404.962.1000

CHARLOTTE704.384.2600

GREENSBORO 336.378.5200

WILMINGTON 910.815.7100

RALEIGH 919.755.8700

GREENVILLE 864.242.6440

®Attorneys at Law

Rob Marcus, Firm Chairman, Charlotte, N.C.Smith Moore Leatherwood LLP | Attorneys at Law

www.smithmoorelaw.com

Look to the fi rm with 60 attorneys listed in the following categories of The Best Lawyers in America® 2011:Copyright 2010 by Woodward/White, Inc., Aiken, SC

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Boomers (those born between 1946 and 1964) are the largest generation in U.S. history, and currently represent 28 percent of the U.S. population. As they approach traditional retirement age, we must examine how their changing needs and behaviors will impact our clients, their businesses and the law.

An SEC report shows that Boomer investors control $13 trillion in household investable assets, which account for more than half of the total household investments in the United States. According to the Center for Retirement Research at Boston College, Boomers stand to inherit $8.4 trillion more from their parents and grandparents.

It seems reasonable to project that over the next couple of decades, the spending habits of this demographic will change considerably, with increasing amounts of their resources being directed towards health care.

Reports indicate that a great many Boomers plan to continue working past the traditional retirement age of 65. Th is demographic wave of older workers means employers can also anticipate additional liabilities for the cost of employee benefi ts. Also necessitated is an increased awareness regarding age discrimination in the workplace.

On the fl ip side, companies with Boomers that do retire may feel what’s called a “Brain-Drain,” the loss of knowledge and experience of senior workers and managers. Business succession plans are critical to the longevity of most companies. It’s also important to note that Generation X (the generation following the Boomers) is only about half the size of the Boomer generation, so the talent pool from which senior workers can be replaced is considerably smaller than in the past.

One in six Americans are projected to be 65 or older by the year 2020. Retirement communities, long term care facilities, estate planners, and health care institutions are all on the brink of tremendous growth. Th e remainder of the U.S. economy, and the businesses that fuel it will need to adjust to the changing needs and behaviors of almost one third of the population. As always, the attorneys of Smith Moore Leatherwood will be prepared to address the challenges that our clients will face as this momentous demographic change comes into focus.

Rob Marcus is Smith Moore Leatherwood’s Chairman. The focus of his legal practi ce is on complex commercial

and appellate liti gati on. He has represented numerous corporati ons and fi nancial insti tuti ons in high profi le and

complex liti gati on matt ers throughout the state and federal courts in North Carolina and elsewhere. He is also well-

versed in alternati ve dispute resoluti on, including mediati on and arbitrati on.

Rob has been selected by Law & Politi cs Magazine for inclusion in North Carolina Super Lawyers for Business

Liti gati on and is listed in Woodward/White’s Best Lawyers in America for Business Liti gati on, and Mass Tort Liti gati on.

[email protected]

704.384.2630

From the Chairman

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CONTENTS

Perspecti vesTh ree unique takes on the impact of the Boomer generation

From the ChairmanA letter from Smith Moore Leatherwood’s Chairman

Profi lesCarole Bruce

Legal News You Can UseSML Perspectives is now online

Boomers & BeyondRedefi ning Aging



Age Discriminati on:A New Workplace Awareness

Estate Planning 101

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perspectivesSML


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P.08P.03 P.20P.14

Departments



How to Freeze Your AssetsA Sophisti cated Way to Escape Gift Taxes

Navigati ng the Estate TaxWhat You Need to Know About the New Rules

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CONTENTSFEATURES

Profi lesCarole Bruce

A Fresh Look at Our Food Supply Chain?Investi gati ng the Food Safety Modernizati on Act:Th e last time Congress passed major legislation related to food safety was 1938. Th is article takes a look at the new legislation that was passed in January 2011, granting the Food and Drug Adminstration additional powers to regulate some foods.

Arbitrati on: Always a Great Idea! Or Is It?It’s oft en said that arbitration is a great idea—so long as you win. Th e perceived benefi ts of arbitration might not necessarily bear out, and even if they do, it may come at the expense of your full rights.

Non-Profi t Health Care Organizati ons and Joint Real Estate Ventures: The Pitf alls of Choosing a Business Enti tyIncreasingly, tax-exempt health care organizations are being creative in their choice of business entity for the purpose of joint ventures with individuals and/or non-exempt parties (like doctors or ancillary services).

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The Top Ten Mistakes Employers Make That Can Lead to Liti gati onReminding you of the fundamental ways you can protect your company (and how you can keep “testify in court” off your to-do list.)

P.38 Instant Runoff Voti ng: North Carolina Leads the WayInstant Runoff Voting (IRV) is a method that provides a way to resolve a race without need for an additional, and costly, day of voting if none of the candidates secure a majority. North Carolina recently elected an Appellate Court Judge in this way.

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VOLUME ONE | 2011

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Contributors

Rob MoseleyPartner, Greenville, S.C.Transportation Team [email protected]

Tod HychePartner-in-Charge, Greenville Offi ce, S.C.Tax and Wealth Transfer [email protected]

All email extensions @smithmoorelaw.com

Jill RaspetPartner, Wilmington, N.C. Tax and Wealth Transfer [email protected]

Brad RisingerPartner-in-Charge, Raleigh Offi ce, [email protected]

Susan FradenburgPartner, Greensboro, N.C.Long Term [email protected]

Peter RutledgePartner, Greenville, S.C. Labor & [email protected]

Bill DennisPartner, Greenville, S.C.Tax and Wealth Transfer Planning Team [email protected]

Fred WoodPartner, Charlotte, N.C.Business Litigation Team [email protected]

Barry HerrinPartner, Atlanta, Ga.Health [email protected]

Richard FewPartner, Greenville, S.C.Tax, Corporate and Public [email protected]

Michael LeePartner-in-Charge, Wilmington Offi ce, N.C.Commercial Real Estate,Land Use/[email protected]

Alex MaultsbyPartner, Greensboro, N.C.Labor & [email protected]

perspectivesSML


QUESTIONS, COMMENTS OR LETTERS TO THE EDITOR:

Brenda Stewart, Managing [email protected] Moore Leatherwood LLPAtt orneys at Law300 East McBee Avenue, Suite 500Greenville, SC 29601864.242.6440www.smithmoorelaw.comwww.smlperspecti ves.com

All contents © COPYRIGHT 2011 Smith Moore Leatherwood LLP. All rights reserved. No part of this publicati on may be reproduced or transmitt ed in any form or by any means without writt en permission from Smith Moore Leatherwood LLP. The informati on contained herein should not be interpreted as legal advice with respect to specifi c situati ons.

Editor-in-Chief:Michael [email protected]

Managing EditorBrenda [email protected]

Executi ve EditorJess [email protected]

Creati ve DirectorJess [email protected]

Copy EditorsKathy [email protected]

Gayle [email protected]

Circulati on/Subscripti onsLisa [email protected]

Web DevelopmentGeorge [email protected]

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perspectivesA Smith Moore Leatherwood Publicati on

QUESTIONS, COMMENTS OR LETTERS TO THE EDITOR:

ATLANTA CHARLOTTE GREENSBORO GREENVILLE RALEIGH WILMINGTON 404.962.1000 704.384.2600 336.378.5200 864.242.6440 919.755.8700 910.815.7100

William L. Dennis, Tax Team Leader, Greenville, S.C.Smith Moore Leatherwood LLP | Attorneys at Law | www.smithmoorelaw.com

®Attorneys at Law

Business Tax PlanningStructure, formation and reorganization of business entities with tax impact analysis.

Tax ControversiesRepresenting taxpayers in audits and appeals before the IRS and state taxing authorities, as well as tax litigation; and obtaining private rulings from the IRS regarding the tax effect of proposed transactions.

Employee Benefi tsAll forms of tax-qualifi ed plans, including pension, profi t sharing, section 401(k), and safe harbor plans; all types of tax-advantaged benefi t arrangements; ESOP design and implementation, leveraged ESOP transactions, and coordination of ESOP matters with other planning.

Estate and Wealth Transfer PlanningSuccession planning for family-owned businesses; structuring estate plans to minimize estate, gift and GST taxes; drafting wills, all types of trust arrangements, durable powers of attorney, health care directives, and “special needs” trusts; sophisticated tax-reduction devices, including personal residence trusts, limited partnerships and limited liability companies, grantor trusts, and GRATs; structuring charitable planning; review of insurance products and insurance planning; and asset protection planning.

Exempt Organizati onsProviding guidance to both private and public tax-exempt organizations and community foundations; coordinating this work with the client’s estate planning.

Transacti ons, Mergers and Acquisiti onsStructuring transactions between entities so as to minimize adverse tax impacts; handling like-kind exchanges.

keep a bigger slice of the pie

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perspectivesSML

845%

65

80

The percentage of the U.S. populati on that will be aged 50 and older in the year 2015. (AARP)

78 million The number of Baby Boomers (those born between 1946 and 1964) living in the United States, in 2009. (U.S. Census Bureau)

The age at which Boomers think “old age” offi cially begins. (Del Webb 2010 Baby Boomer Survey)

The age past which Boomers generally plan to stay in the workforce. (Metlife’s 2010 Report on Early Boomers)

on the Baby Boomers

10,000The approximate number of Boomers reaching age 65 each and every day.

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perspectivesTh e practice of law itself has been changed dramatically by the Boomer generation. Boomer lawyers accelerated the exciting trend to concentrate their practices on specifi c areas of the law, rather than becoming generalists that touch on a little bit of everything. Th e pre-Boomer generation was much smaller, and had fewer competing lawyers than the Boomers, who found themselves working in a more competitive environment. It became important to stand out in one specifi c niche, with services that appealed to increasingly sophisticated clients.

Th at, in turn, changed the structure of law fi rms in general: larger fi rms with many lawyers focused on niche practice areas became the norm, rather than small handfuls of attorneys working together that were jacks-of-all-trades. We have quite a few Boomers at this fi rm, and they have been responsible for upping the standard of excellence we have come to expect from the generations of lawyers coming aft er them.

Larry Sitt on has been selected by Law & Politi cs Magazine for inclusion in North Carolina Super Lawyers, Business Liti gati on, and as one of the “Top 100” att orneys in North Carolina, 2006-2011.

larry.sitt [email protected]

Larry Sitt onPartner

Charlott e, N.C.

Sanders CarterPartner

Atlanta, Ga.

More and more workers are choosing to continue their employment beyond the traditional retirement age of 65. As workers age, their employers may face increased costs for welfare benefi ts such as health, disability, and life insurance.

Th e sheer number of workers approaching traditional retirement age also increases the likelihood that some of them may become unhappy with the performance of their employers’ pension plans. Add to this circumstance an uncertain economy, and fi duciary breach litigation against employers may increase as well.

Th e Employee Retirement Income Security Act of 1974 (ERISA) is a federal statute that governs welfare and retirement plans in private industry. As the Baby Boomer population continues to age and remains in the workforce, employers and insurers alike will almost certainly see more benefi ts claims as well as increasing rates of ERISA litigation.

Sanders Carter has been selected by his peers for inclusion in The Best Lawyers in America® 2011 (Copyright 2010 by Woodward/White, Inc., of Aiken, S.C.), Insurance Law, 2010-2011.

[email protected]

Frank Marti nPartner

Wilmington, N.C.

Th e Boomers are creating, at an accelerating pace, a tremendous challenge to the building and retirement industries.

As the building industry recovers from the recent recession, it will be forced to adapt to accommodate the Boomers, many of whom insist on smaller and more effi cient living spaces with proximity to their workplace, amenities such as walking and biking trails, and shopping areas and restaurants within walking distance of their homes.

Residential communities consisting of a mixture of single-family homes, condominiums, townhomes and apartments for virtually all price ranges are becoming the trend. One such development in Wilmington, N.C., Autumn Hall, is also working with a nationally-recognized health care and retirement community provider to develop an upscale retirement community within their development. Th ey will provide both independent living and assisted living designed for both the Boomer and the “Silent” generations. We expect to see this trend continue.

Frank Marti n is a North Carolina Board Certi fi ed Specialist in Real Property Law - Residenti al Transacti ons. He is also past President of the Downtown Area Revitalizati on Eff ort (now Downtown Wilmington, Inc.) .

frank.marti [email protected]

What has been (or will be) the impact of this demographic wave?

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1010here are almost 76 million Boomers in the United States, (those born between 1946 and 1964), and they are

notorious for shaking things up. Th ey are the generation of the Vietnam War, the fi ght for civil rights, and the questioning of social mores. It should come as no surprise as these hipsters hit grandparenthood or retirement, they are completely redefi ning what it means to age.

In 2005, (before the recent economic crisis), Merrill Lynch conducted a survey to determine the Boomer’s ideal work arrangement in retirement. 42 percent said they would cycle between work and leisure; 16 percent would work part time; 13 percent would start their own business; 6 percent would work full time; and only 17 percent said they would never work for pay again. Many Boomers prefer not to even think of “retirement”; they merely want to “change gears.” Sixty has become the new forty.

No matter your generation, you are undoubtedly delighted to hear that life expectancies continue to grow. According to the U.S. Census Bureau, life expectancy increased 7.5 years from 1970 to 2010. By 2020, they anticipate another increase of 1.2 years.

REDEFINING “AGING”But living longer requires careful consideration of how to approach frightening issues like transitions in livelihood, preservation of assets, and protecting your rights when health care concerns arise and general competence starts to decline. In 2005, the Merrill Lynch study revealed that Boomers were signifi cantly more afraid of contracting an illness (48 percent); being able to pay for health care (53 percent); or winding up in a nursing home (48 percent); than they were of dying (17 percent).

Th e articles that follow shed light on some of these frightening issues, including how you might choose a long term care provider should you need one, and age discrimination in the workplace.

Financial preparedness is one of the best ways to combat fears related to aging, and it’s now more important than ever. More than 10,000 boomers a day will turn 65 over the next 19 years; the age at which Americans become eligible for Medicare. Sixty-two is the age of eligibility for Social Security, and nearly three out of four people fi le claims for benefi ts as soon as they are eligible.

With soaring government defi cits and droves of people taking more money out

TREDEFINING “AGING”

of the government benefi t systems than is put in, self-reliance is the only assurance of a comfortable retirement. However, the rates at which we are taxed, and the sheer number of taxes we face require increasingly sophisticated tax planning to ensure that you (or your heirs) get to retain as much of the money you earn as possible. In the following pages, some rather meticulous tax attorneys have outlined a few key tax issues to assist you in doing just that.

Generations X, Y and Millennial will undoubtedly look to the trailblazing Boomers to develop a new way of thinking about how long we should work, what the role of government will be in retirement, and how well we live into old age. But please don’t let Boomers know I mentioned the word “old.”

Michael Lee is the Partner-in-Charge of Smith Moore Leatherwood’s Wilmington, N.C. offi ce and the Editor-in-Chief of SML Perpsectives.

[email protected]

by Michael Lee

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by Michael Lee by Richard Few

With a tip of the hat to Broadway and Hollywood for the 1960s hit musical “How to Succeed in Business Without Really Trying”, if you are an owner of a family or other closely held business, you should be really trying to make it a priority to develop and implement a business succession plan. By not trying to plan for the next generation of owners for your successful business, your retirement, departure or death could leave family and business partners in chaos and ill-equipped to deal with their new found responsibilities for your business.

Business succession planning is neither a joyful undertaking nor one that pays immediate dividends. For this reason, many business owners cite a host of convenient excuses for avoiding the issue altogether—it takes too much time, it is too complicated, or it is a distraction to current business. In reality, some business owners dread tackling succession planning, because it means contemplation of unpleasant events, such as giving up control of their company or their own inevitable end. For all the excuses justifying delay or avoidance, there are a variety of worthwhile reasons to embrace the business succession planning process sooner rather than later—it can train family members or business partners to manage the business effi ciently, it can provide the owner and his or her family with a much needed nest egg for the future, and it may signifi cantly reduce taxes.

Ensuring Future SuccessThe Importance of The Importance of Succession Planning Succession Planning for Business Ownersfor Business Owners

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Once the decision is made to launch the planning process, you should be prepared to

sift through numerous, and often complex, options and strategies that can be employed for business succession. There are no ready-made solutions for finding the right strategy that will work for your business. Consulting with your “management team” —family members, business partners and trusted financial and legal advisors—to formulate the appropriate plan for your business is the best approach to prudent business succession planning. Within the variety of succession strategies, a few of the more popular alternatives recommended by business owners and their advisors are described below.

Lifetime GiftsUsed mostly in family-owned business situations, business owners can gift equity interests in the business to children or other family members. Tax-free gifts of $13,000 in value can be made to any one individual each year. With the reinstatement of the U.S. estate tax regime this year, accompanied by an increase in the amount that can be given or devised by any individual without gift and estate taxes to $5 million, some business owners may elect to gift greater amounts. Lifetime gifts can also be utilized in conjunction with some of the other business succession options described in this article. However implemented, the gifted business interests will not be included in the business owner’s estate.

95% of American

businesses are family owned, but only 28% of those businesses have a succession

plan.

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by Barry Herrin12

purchase price for the interest can be paid in cash or in installments over a period of time. However, any remaining cash or the balance of the unpaid installments will be includable in the o w n e r ’s estate. As variations of these structures, business owners could consider structuring the sale as a “private annuity” or using a “self-cancelling installment note” (SCIN).

With a private annuity, the purchasers agree to make periodic payments of the purchase price plus interest for the remainder of the owner’s life. Upon the owner’s death, the annuity ends and its value is not included in the owner’s estate. The disadvantages of the annuity are that the tax on any gain must be paid immediately and there can be no collateral or security like a mortgage for the payments. The SCIN is similar in that it also terminates at death, but the tax on the gain can be spread over the payments and the payments can be secured. The one disadvantage is that if the self-cancelling feature is not supported by consideration, the Internal Revenue Service can assert that part of the sale is a gift. Therefore, some reasonable premium must be added to the price of the interest, which increases the gain realized.

Sale of Business InterestThe business owner can sell his or her equity interest to family members or business partners. If potential estate taxes are an issue, the sale can be made during a lifetime with any capital gains taxes applicable to the sale. The owner could also enter into a buy-sell agreement with those family members or business partners requiring them to buy the interest on pre-arranged terms upon the owner’s death if estate taxes are not problematic or upon retirement if a lifetime sale is more advantageous from a tax perspective.

For sales during the business owner’s lifetime, several “tax planned” payment alternatives are available. Of course, the

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Grantor TrustsA more sophisticated business succession tool is a “grantor retained annuity trust” (GRAT) or “grantor retained unitrust” (GRUT). Th ese are irrevocable trusts to which the business owner transfers his business interest in exchange for agreed income payments for a period of time. With the GRAT, the owner receives a fi xed amount payable in specifi ed installments over that period. With the GRUT, the owner receives a fi xed percentage of the value of the GRUT property as that value fl uctuates over time for the specifi ed period. In either case, upon the owner’s death, the value of the owner’s retained interest is deducted from the value of the GRAT or GRUT property, which can signifi cantly reduce the amount that could be subject to estate taxes.

Family Limited PartnershipsFor owners needing to maintain control of

the business and seeking to

reduce estate tax exposure, a family

limited partnership (FLP) off ers a structure

to accomplish both goals. Th e business owner

establishes the FLP with a general partner interest

which has voting control of the FLP and limited partner

interests. Initially, the business owner owns all of the interests and transfers his or her interest in the business to the FLP without estate, gift or capital gains taxes. Th ereaft er, the owner gift s the limited partner interests to family members. Since the gift ed FLP interests lack voting control and are not readily marketable, the value of the FLP interests can be signifi cantly discounted for gift tax purposes.

Your“Succession” Future is No� …It is reported that at least 95 percent of American businesses are family owned, but only 28 percent of those businesses have a succession plan. With a signifi cant majority of American business owners lacking a clear vision for the future of their businesses, the time to act on a business succession plan is now. All it takes to get started is a list of a few simple questions, such as the one suggested below, and an initial meeting with your trusted advisors.

• Do you have defi ned personal goals for the transfer of the ownership and management of your business?

• Are successors identifi ed and in place?

• Will family members be involved in leadership and ownership?

• Are potential estate taxes a concern?

• Do the business and its owners have a buy-sell agreement?

• Do you have suffi cient cash and other liquid assets to meet your retirement needs and support your family aft er death?

Once the planning process is initiated, you and your management team can work together to design and implement the appropriate succession plan for your business. Th at succession plan can then serve as a road map to guide your successful business to the next generation of leaders prepared to assume that responsibility.

Richard Few is a Partner in Smith Moore Leatherwood’s Greenville offi ce. He is a member of the Tax Committee of the South Carolina Chamber of Commerce Board of Directors. His legal practice includes strategic and tax planning and structuring business entities, business sales, acquisitions and reorganizations, private placements of securities, and commercial and public fi nancings.

[email protected]

Legal News You Can Use

Introducing smlperspectives.com

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We are pleased to announce the launch of SML Perspectives Online, a website covering legal developments and concepts related to corporate, health care, commercial real estate, labor & employment law, and litigation through a provocative mix of news, analysis, and commentary. SML Perspectives Online is updated weekly, featuring articles and alerts on current developments in the law not found in our quarterly print publication. It also contains the full text of past issues of the print edition of SML Perspectives. SML Perspectives Online is entirely free.

Subscribe today for up-to-date news on matters of law as they relate to you

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taKing tHe Fear out oF cHoosing a nursing HoMe

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For many people the thought of having to choose a nursing home for a loved one, or fi nding one for themselves, can be a daunti ng and threatening experience. We have all seen the commercials from att orneys suing nursing homes for abuse, and we may have visited some nursing homes and had a less than pleasant experience. However, there are quality homes that can take great care of you or your loved one. While there is no magic formula for fi nding a nursing home, this arti cle hopes to provide you with some background that will help to make the decision process easier.

by Susan Fradenburg

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Try to speak with both CNAs and nurses when you visit a home. Ask the staff questions such as “do you like your job” and “why.” Also ask how long they have been working at the home. Remember, staff can be busy providing care (their first priority) and may not be able to stop and chat with you. Even if they are busy, you can learn some things about the home based on how staff reacts to your question or informs you they cannot talk.

Do not be too concerned if you speak with many CNAs who have not worked at the home for a long time. While longevity of staff is great to have, high turnover is common in the nursing home industry with the average turnover rate for CNAs in North Carolina

First Hand Knowledge is tHe Most ValuableFirst and foremost, you need to visit the nursing home or have someone you know and trust visit the homes you are considering. You can research information on the Internet for hours on end, but at the end of the day, actually being at the home, meeting staff and administration will provide you with some of the best information.

The question then becomes, what do you do when you get there?

We have set forth below some different areas to consider and ask about when you are at the home.

staFFingFirst, you may want to find out what types of “shifts” staff work. Most nursing homes are set up to have staff on either two twelve hour shifts, 7 a.m. to 7 p.m. and 7 p.m. to 7 a.m. or three eight hour shifts, possibly 7 a.m. to 3 p.m., 3 p.m. to 11 p.m., 11 p.m. to 7 a.m. You should try to visit the nursing home during at least two of the shifts so as to observe different staff members. Staffing can vary from shift to shift and from weekdays to weekend. The home must post daily the number of licensed and unlicensed staff per resident; for the most part, the higher the number of staff per resident the better.

There are different levels of staff at the nursing home. Certified Nursing Assistants, (CNAs) interact daily with residents and provide basic care such as assisting with dressing, bathing, and eating. CNAs do not hold a nursing degree but are required to complete a course and pass a test to receive their certification. CNAs will be the staff members that interact most with the residents.

Registered Nurses (RNs) and Licensed Practical Nurses (LPNs) hold nursing degrees and will be responsible for medication issues as well as other health care related activities, such as wound care. RNs have the authority, based on licensure requirements, to perform more health care related activities than LPNs.

being close to 100 percent. Also, ask the staff if they are usually scheduled to work on the same hall/rooms each day. Consistency of staff for a resident usually allows the staff to better interact with a resident, and allows staff to get to know a resident and identify what is “normal” behavior for a resident. This in turn should help them identify when something is wrong.

Even if you don’t speak with the CNAs and nursing staff directly, much can be learned about the care that will be provided at the home by observing their actions. Consider whether staff is standing around gossiping with each other or engaged with the residents. Do they know the residents’ names? If one staff member needs assistance, are other staff members happy or reluctant to help?

While on-line resources may provide you with

a starting point for gathering information, you should not rely on

them solely.

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The home’s Medical Director is another individual that you should meet and talk to before choosing a nursing home. Usually the home’s Medical Director will also be the resident’s physician once the resident is admitted to the nursing home. While residents have the right to choose any physician, the Medical Director will actually come to the home so the resident does not need to arrange transportation to a physician. You should ask to meet the Medical Director and see if he or she is someone with whom you feel comfortable.

Finally, you will want to meet the Administrator and Director of Nursing. These two individuals are, in essence, “in charge” of the entire home. It may be helpful to observe how they work together and to note how responsive they are to your questions. Either of these two individuals should be able to answer any questions you may have.

Facility space Many facilities are attempting to convert from the rigid institutional living often associated with nursing homes, to a more home-like setting. Facilities that are moving toward the home-like setting may attempt to provide greater flexibility regarding resident schedules and activities. These homes may be broken down into smaller sections and/or “neighborhoods” of less than 20 residents. The areas should have the same staff assigned to them and the residents in these “neighborhoods” may also have meals and activities together. Facilities are also incorporating animals such as birds or fish into the home to provide a more home-like environment.

Two other physical space issues to consider are sprinklers and security. All facilities must have sprinklers by 2013, but at this time there could still be older facilities without sprinklers. With regards to security, ask how the building is secured at night. How and when are the doors locked? Is there a security guard on the premises? If there is a concern that a resident may wander away, ask if the home has a secured unit. If not, ask if they have a system where the door automatically locks once a resident wearing a “bracelet” gets close to the door.

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restrictionsIn North Carolina, there is no smoking permitted inside a long-term care home. If your loved one is a smoker, make sure to see the outside smoking area. Additionally, the federal government encourages facilities to be as free from restraints as possible. Some long-term care facilities do state that they are “restraint free”. Th at means that restraints such as bed rails and certain wheelchair belts will not be used even if the resident has a risk for falling. Find out the home’s position regarding restraints and how it handles residents at risk for falling.

on-line and otHer resourcesNursing homes are surveyed by state agencies that have been given authority to conduct surveys on behalf of the Centers for Medicare and Medicaid Services (“CMS”). Surveys are performed at least once a year and any time there is a complaint. Nursing homes are expected to satisfy approximately 150 requirements. Th e most recent survey is to be posted or readily available at the home. Th e survey document can give you an overview of how the home is doing with regards to satisfying federal requirements.

Th e survey document has two columns. It lists the defi ciency in the left -hand column and then the home’s response or “plan of correction” is set forth in the right-hand column. Survey defi ciencies are given “rankings” from “A” to “L”. “A” means that the defi ciency only impacted a few residents and did not cause or was not likely to cause over minimal harm. “L” means a defi ciency impacted many residents and caused them or was likely to put them in immediate jeopardy to life and safety. A summary of survey fi ndings for the last three years and a facility’s Star Rating can be found at CMS’ website, www.medicare.gov/NHCompare/

Th e CMS website contains a great deal of information about nursing homes, including a comparison of staffi ng numbers, a breakdown of staffi ng by nurses and CNAs, and the home’s report of how it does addressing “quality indicators,” such as how many residents have been vaccinated for the

fl u, how many residents are incontinent, and how many residents have pressure sores.

Finally, the local ombudsmen are a good resource for gathering information. Th e local ombudsmen are advocates for residents; they should be familiar with the nursing homes in the areas to which they are assigned and be able to answer your questions regarding the nursing homes. To identify what ombudsman may have information regarding your particular area, see the following sites:

nortH carolina

www.forltc.org/ombudsmenlist_files/ombudsmenlist.htm;

soutH carolina

www.aging.sc.gov/ContactInformation/

georgia

www.georgiaombudsman.org/location.asp

While on-line resources may provide you with a starting point for gathering information, you should not rely on them solely. Th ere can be decent facilities with a lower star rating, and some 5-star facilities, while satisfying every mark on the survey, may not have staff that are as compassionate or understanding as facilities with a lower star rating. Th at is why it is important to also visit the home.

Choosing a nursing home is an extremely important decision. Hopefully, the information in this article will help provide you with the tools you need to identify the nursing home that will best meetyour needs.

Susan Fradenburg is a Partner in Smith Moore Leatherwood’s Greensboro, N.C. offi ce. She routinely represents nursing homes, home health agencies, and other health care providers in risk management, medical ethics, operational issues, and contract disputes.

[email protected]

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settlements of $45.2 million in 2000 and $93.6 million in 2010, an increase of over 100 percent. Litigation numbers trended in the same ways and resulted in far greater costs to business, both in fees and damages paid.

Of course, all discrimination claims have increased since 2007, as many employees lost jobs across all sectors of the workforce. With fewer opportunities for re-employment, those out of work have resorted to suing at a higher rate than usual. For older workers, fi nding a new job can be even harder, contributing to the tendency to seek aid through litigation. And, as companies downsized in the past few years, higher wage earners who were generally older tended to be disproportionately aff ected. So, the pool of plaintiff s has grown and is weighted toward an older population.

Age discrimination claims are particularly dangerous for employers. Jurors sympathize with age. In race claims, white people on the jury might not fully understand what it means to be black. In gender claims, male jurors cannot truly place themselves in the shoes of a female plaintiff . Same with disability claims. But everyone can more closely feel what it means to be old. Even a younger juror might think, “I would not want someone to treat my mom or dad that way.” Or, “I will be the plaintiff ’s age one day, and I sure hope no one

fi res me and leaves me unable to fi nd another job.” Age claims land closer to home for each and every juror, and jurors are more likely to protect those with whom they personally connect.

Further, as a very general matter, people more readily believe that an employer will treat someone diff erently because of age than because of race, gender, religion or disability. It might not be true, but people believe it.

So, more workers are older, more older workers are suing for age discrimination, sympathies oft en lie with older workers, and jurors are more prone to believe age discrimination occurs.

Odds are, then, that you will face an age discrimination claim, either actual or threatened. Th ese claims most frequently arise in two scenarios: (1) discipline or discharge due to performance or conduct, and (2) discharge due to a reduction in force.

As with any other discrimination claim, proof of bias requires either some direct evidence that reveals bias—a manager’s age-related comments, for example—or some indirect evidence from which courts will allow a jury to infer bias. Avoiding direct comments is obvious enough, but preventing inferences

ust as our own aging is unavoidable, the demographic wave of the Baby Boom generation is having its own inevitable eff ect. Consider some statistics from the Census Bureau:

In 2000, our country had around 3.4 million employees age 65 and up; in 2009 there were 6 million. Th e percentage of all Americans in that age range who remained employed increased from 11.5 percent in 2000 to 16.1 percent in 2009.

Between 2000 and 2010, the number of Americans age 55 and older increased from 59.5 to 76.5 million. Government projections say there will be 97.8 million Americans who are 55 or older by 2020.

If demographics were not enough to age our workforce, the bad economy has made seniors hold on to a steady income longer than they had previously planned.

As statistics would predict, the advancing age of the workforce has resulted in a corresponding increase in litigation over age discrimination. According to their own published statistics, the EEOC fi elded 16,008 charges of age discrimination in 2000 and 23,264 in 2010, an increase of 45 percent. On behalf of claimants, the EEOC helped obtain

We are getting older as a nation of workers. And older employees are remaining employed longer than in years gone by. Age 65 no longer means a retirement party, cake and a commemorative clock to watch as the sunset years roll by.

A New Workplace Awareness

18

settlements of $45.2 million in 2000 and ust as our own aging is unavoidable, the

We are getting older as a nation of workers. And older employees are remaining employed longer than in years gone by. Age 65 no longer means a retirement party, cake and a commemorative clock to watch as the sunset years roll by.

A New Workplace Awareness

AGE DISCRIMINATION

J

by Alex Maultsby

18

1919

of bias is much more diffi cult. Consider a few areas where cases are lost.

Inadequate Performance Evaluations

Managers oft en tend to go easy in evaluations, avoiding today’s confl ict and putting off diffi cult conversations. Some do not even conduct regular evaluations, leaving an employee surprised when poor performance is the reason for discharge. Frequently in reductions in force, managers are asked to rank their most valuable employees. When rankings do not fi t well with what the personnel fi les say about historical performance, an employer appears inconsistent and not credible. If aft er years of decent reviews, a 55-year old is among those included in a downsizing, a juror will be suspicious if the employer cites poor performance as a factor in deciding not to keep him employed.

Simply, employees need to know how they are performing, and employers need to be honest and timely with that feedback. Th ose practices are good not only for productivity but also for legal protection. Do not create your own worst documentation by giving a favorable evaluation to an employee who has not earned it. Poor Documentati on of Bad Behavior

Employers regularly rely on past misbehavior as a basis for today’s discharge, typically as part of following a progressive disciplinary policy. Oft en, though, no one documented the previous issues, even though management remembers them and knows they occurred. When the employee remembers it diff erently, a factual question of what really transpired will arise; and fact questions like that are oft en left for a jury to resolve. If an older employee can contest the employer’s version of his work history by pointing to a lack of confi rming documentation, an age case can be diffi cult to dismiss before trial.

Inconsistent Applicati on of Policies

Diff erent treatment of employees in diff erent protected categories (here, older v. younger) is the classic basis for a discrimination claim. Th us, for example, allowing a younger employee

to slide by when he violates an attendance rule means risking an age discrimination claim when fi ring an older worker for too many absences. Tolerating off ensive language from a worker in his twenties but not from one in his fi ft ies will interest an EEOC investigator or a plaintiff ’s employment attorney. Th e need for consistency is fundamental—everyone knows it—but managers nonetheless bend rules all the time to fi t individuals and circumstances. Train supervisors to document rule violations and to explain why any accommodations or extra chances are granted. Even then, relying on a frequently-bent rule to justify fi ring an older worker may not hold up in court.

Careless Discussions of Reti rement

Mandatory retirement is against the law; few exceptions exist. Without any fi rm, mandated date in place, employers may be in the dark as to what an employee’s plans are. Having these communications is tricky, as no one wants to make age-based comments an employee might later claim indicate bias. Discussing matters in terms of the employee’s commitment to remain with the company can convey a desire to keep the employee instead of suggesting an interest in moving him out.

Not Recognizing the Harm of Ageist Remarks

Comments about someone’s race, gender-based jokes, expressions of religious intolerance—these bring HR rushing to

the scene to mete out punishment. We reject such remarks not only because they are inappropriate, but because of their implications for bias claims by unhappy employees, current and former. But, do we act so quickly when someone is referred to as the old guy? As the senior citizen of the offi ce? What about less direct remarks like being past his or her prime? No longer having the same passion? Espousing tired or worn out ideas? Th ese comments are not so socially unacceptable, but they are dangerous from the perspective of employment law. Whether an accurate indication of bias or not, they can absolutely sink a defense to an age discrimination claim.

Missing Opportuniti es for Severance Agreements

Severance agreements for older workers can eff ectively reward their years of service, off er a transition to reduced earnings, and prevent discrimination claims. Waivers of age claims are possible, but they require very technical language, a waiting period, advice to consult an attorney, and time to revoke. Extra requirements apply in a reduction in force. Missing the window to accomplish an enforceable waiver and release can be costly down the road.

Ultimately, when it comes to preventing successful age discrimination claims, there is no silver shield. Th e best defenses are the good, honest and thorough HR practices that all employees deserve—young or old.

Alex Maultsby is a Partner in Smith Moore Leatherwood’s Charlotte and Greensboro, N.C. offi ces. He is a member of the Labor and Employment team, and was selected by his peers for inclusion in Th e Best Lawyers in America®, Labor and Employment Law, 2009-2011.

[email protected]

Charlotte: 704.384.2651Greensboro: 336.378.5331

A New Workplace AwarenessThere is no silver shield.

Preventi ng successful age discriminati on claims diff ers litt le from avoiding claims under Title VII of

the Civil Rights Act of 1964.

”

“AGE DISCRIMINATION

®Attorneys at Law

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20

Citizen Citizen LawyerLawyer

Profi le

Th omas Jeff erson believed that lawyers should not only be excellent legal craft smen, but also good citizens and leaders of their communities. Few lawyers exemplify this ideal more completely than attorney Carole Bruce.

Carole has a rather impressive legal practice relating to individual income tax, estate administration, and other tax planning matters. But it is her eff orts with charitable organizations and associations dedicated to the betterment of the Greensboro, N.C. community that demonstrates her work in the legal profession is not just a way to make a living, it’s a calling.

For many years, Carole has used her talents and training to improve the lives of those around her through projects ranging from the National Conference for Community and Justice, to the International Civil Rights Museum. Most recently, her role as Chair of the Greensboro Partnership, an organization formed in 2005 to serve as the principal economic and community development organization in Greensboro, N.C., has occupied her time and attention in selfl essly promoting the common good.

Th e work of the Greensboro Partnership is accomplished through three member organizations:

Action Greensboro: A leading voice in urban livability, civic engagement, K-12 educational advancement, and initiatives to attract and retain young professionals in Greensboro. Projects have included the construction of the downtown baseball stadium, Center City Park, and now through the development of the Downtown Greenway.

Th e Greensboro Chamber of Commerce: Facilitating business networking, leadership development and small business education. Th e Chamber is growing the economy one business at a time.

Th e Greensboro Economic Development Alliance (GEDA): Focused on recruiting new companies to Greensboro and Guilford County, as well as helping existing companies expand. Th ey seek to facilitate the creation of high quality jobs, attract new capital investment, and improve both per capita income and quality of life.

When asked about the initiatives most important to the Greensboro Partnership, Carole’s response was simply, “Jobs, jobs, and more jobs.” She not only feels the pulse of the Greensboro community, she’s at its heart.

• Selected by her peers for inclusion in Th e Best Lawyers in America® 2011 (Copyright 2010 by Woodward/White, Inc., of Aiken, S.C.), Trusts and Estates, 2009-2011

• Business North Carolina’s Legal Elite, Tax/Estate Planning, 2003-2007, 2009-2011

• Selected by Law & Politics Magazine for inclusion in North Carolina Super Lawyers, Tax, 2007

• North Carolina Bar Association Citizen Lawyer Award, 2009

• Triad Business Journal’s Most Infl uential People in the Triad

• Triad Business Leader’s 2007 Women Ex-traordinaire

• Greensboro Partnership 2007 Th omas Z. Osborne Distinguished Citizen Award

• Auburn University, College of Business 40 of 40 Award recognizing Outstanding Alumni, 2008

• Trustee, Guilford College

• Director, Board of Th e Joseph M. Bryan Foundation

• Director, Board of Th e Stanley and Dorothy Frank Family Foundation

• Chair of the Board, Greensboro Partnership

• Director, First Tee of the Triad

Carole BruceCarole BruceCarole BruceCarole BruceCarole Bruce

20

Carole Bruce is a Partner in Smith Moore Leatherwood’s Greensboro, N.C. offi ce. She can be reached at [email protected] or 336.378.5396.

®Attorneys at Law

We take care of your legal concerns so you can take care of your residents.

Long Term Care TeamATLANTA

404.962.1000 CHARLOTTE704.384.2600



RALEIGH 919.755.8700


Maureen Demarest Murray, Long Term Care Team Leader, Greensboro, N.C.Smith Moore Leatherwood LLP | Attorneys at Law | www.smithmoorelaw.com

®Attorneys at Law

2222

Why is it important?

What is an Estate Plan?

• So the people you intend to benefi t from your estate receive your assets rather than letting state law dictate who will receive those assets.

• So assets for your children are protected and managed on their behalf until they are of an appropriate age and maturity.

• So assets are left to your benefi ciaries in a tax effi cient manner to protect them from paying taxes unnecessarily.

An Estate Plan has several components, the most basic of which are a will, durable power of attorney, health care power of attorney, a living will, and for many, there are a variety of trusts that off er an array of tax planning benefi ts. Planning can also involve review of the advantages of designating benefi ciaries of retirement accounts, annuities, and insurance policies (charities or individuals), and the giving of fi nancial gift s to charities or individuals during lifetime.

Typically in the estate planning process, people are focused on what happens aft er death rather than what happens during lifetime. Powers of Attorney (“POAs”) are needed to allow someone to act for you during your lifetime if you are unable to act for yourself. Th ere are separate POAs for fi nancial matters and health decisions. People oft en assume that a family member will inherently have the right to act for them if they become incapacitated, but oft entimes this isn’t the case, unless the family member is appointed as a guardian through the judicial system. Th e guardianship process can be lengthy and costly, but usually can be avoided if POAs are in place in advance.

Estate Planning FUNDAMENTALS

People are oft en unsure about whether estate planning is necessary for them because they wonder if the value of their assets is great enough to form “an estate.” One common misconception involves what assets would be included in your estate, and at what value for tax purposes. In addition to bank accounts, stocks, and other tangible assets, inclusion of the fair market value of real estate (based on appraisal not tax value), retirement accounts, and proceeds from any insurance policy received due to death (in most cases) must be accounted for as well.

Many people procrastinate when it comes to estate planning because it can be a sensitive and diffi cult undertaking, and they would prefer not to think about it. But no matter your net worth, and no matter your age, it is important to have a basic estate plan in place. It’s also essential to fi nd a trusted advisor that not only knows the law, but can guide you through delicate situations to make decisions about your future and that of your family.

by Jill Raspet

2323

When should I start planning, and how often should I update my plan?

Who will be impacted by my decisions?

It is never too early to start planning. Th ere is no rule of thumb as to how oft en your Will, Trusts, and Powers of Attorney should be updated, but the following situations should prompt a review:

• Your documents were prepared in another state.

• Your assets or family situation has changed signifi cantly (births, deaths, marriages, or divorces).

• Your wishes have changed with regard to how your property should be distributed at death.

• Your assets (including those of your spouse) exceed $1 million and you have not had your estate plan reviewed in the last several years (laws continue to change).

Th e article that follows provides a detailed look at the recently enacted changes to estate tax laws. Staying abreast of changes to the law is essential to keeping your aff airs in order, and a good attorney will inform you of the need to update your plan as laws change.

Discussing inheritance can be a very emotionally charged event, but having a plan in place clarifi es your intentions and prevents confl ict or confusion later. With no Will in place, state law dictates where your probate assets will be distributed. (Please note that probate assets may exclude certain jointly titled assets or assets passing by contract or benefi ciary designation). Th e two most common situations include:

• If an individual was a resident of North Carolina or South Carolina and was married with living children, at death a portion of the property passes to the spouse and a portion passes to the children (even if they are minors).

• If an individual was a North Carolina resident and was married without living children, at death a portion of the property passes to the spouse and a portion passes to the deceased’s parents (if living). However, if the deceased was a South Carolina resident, all of the property would pass to the spouse.

It can be diffi cult or impossible to “fi x” the distributions without tax disadvantages aft er someone has passed away even if the benefi ciaries are willing to do so.

Guardianship for a minor child is another important area commonly addressed in a Last Will and Testament. A guardian is needed for both the physical custody of the child (guardian of the person) and for control of the minor’s assets, not otherwise in trust (guardian of the estate). In North Carolina, a parent may nominate a guardian under his or her Will, and the Clerk of Superior Court will have the authority to appoint such guardian in the best interest of the minor child but will take into account any nomination made by a parent. In South Carolina, a parent may also nominate a guardian under his or her Will, and the family courts will control such appointment and may make any appointment in the best interests of the child.

Jill Raspet is a Partner in Smith Moore Leatherwood’s Wilmington, N.C. offi ce. She is a Board Certifi ed Specialist in Estate Planning and Probate Law by the North Carolina State Bar. She has also been selected by Law & Politics Magazine for inclusion in North Carolina Super Lawyers–Rising Stars Edition, Estate Planning and Probate, 2009-2011. [email protected] | 910.815.7128

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®Attorneys at Law

ATLANTA CHARLOTTE GREENSBORO GREENVILLE RALEIGH WILMINGTON404.962.1000 704.384.2600 336.378.5200 864.242.6440 919.755.8700 910.815.7100

Patti Ramseur, Labor & Employment Team Leader, Greensboro, N.C.Smith Moore Leatherwood LLP | Attorneys at Law | www.smithmoorelaw.com

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®

Today’s workplace is full of legal hurdles that can trip up the most experienced HR professionals. Let the employment lawyers of Smith Moore Leatherwood

help keep you on track and out of the courtroom.

Labor & Employment Team

2525

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”). Although the primary feature of this legislation is a two-year extension of the Bush-era income tax cuts, the Act also addresses the repeal of the estate tax for 2010 and its reinstatement in 2011. The legislation reenacts the estate tax for 2010 (but grants an option to elect back into the repeal) and provides generous estate and gift tax exemptions and rates for 2011 and 2012. Unfortunately, the Act is only a temporary measure — in 2013, the pre-2001 estate and gift tax provisions will return, with the potential to impose a much greater tax burden on estates and gifts.

The Act presents a number of planning opportunities and also requires that a number of existing estate plans be reconsidered. A few observations follow.

by Bill Dennis

25

by Bill Dennis

naVigating tHe estate taX

®Attorneys at Law

26

Estates of Decedents Who Died in 2010

The estates of those who died in 2010 faced considerable uncertainty prior to the passage of this legislation. A 2001 law repealed the estate tax for persons dying in 2010 but also imposed a carryover basis regime that generally required heirs to use the decedent’s tax basis, with some adjustments, for inherited property. Before 2010, inherited property had received a basis step-up at death. For some heirs, this 2010 requirement was a greater tax burden than would have been imposed by the estate tax. In addition, there was a risk that the estate tax would be retroactively reinstated for 2010.

Congress has now eliminated that uncertainty for 2010 estates. It has repealed carryover basis and reinstated the estate tax for 2010, but with a $5,000,000 exemption and a 35 percent tax rate. The new law also provides that estates of persons dying in 2010 can elect out of the estate tax, provided that they accept the carryover basis regime.

Estates of decedents who died in 2010 should carefully consider whether to accept the new default regime ($5,000,000 exemption; 35 percent tax rate) or to elect out of the estate tax and into the prior 2010 law (no estate tax; but with carryover basis). If the estate is less than $5,000,000, in most (but not all) cases it will be best to accept the application of the estate tax and thereby acquire a basis step-up in the assets. However, an analysis should still be undertaken to determine whether the heirs are better off with a stepped-up basis or the carryover basis regime. It is worth noting that, if the estate of a married decedent accepts the application of the estate tax in 2010, the portability provisions discussed below do not apply to the unused portion of the $5,000,000 exemption.

The estate tax return is normally due nine months after the date of death. In light of the special circumstances in 2010, the Act extends that filing date (as well as the payment date for the tax) for 2010 decedents to September 19, 2011.

The 2001 legislation also repealed the generation-skipping transfer tax (the “GST tax”), as discussed below, for 2010 only, but there was a lack of clarity as to the effect of that repeal. The recent

Act should eliminate that uncertainty, because it provides that the GST tax was in effect in 2010, but with a zero percent tax rate. This means that any generation-skipping transfers that occurred in 2010 were tax-free, but that taxpayers could still take advantage of the various GST tax exemptions that could reduce or eliminate the tax in future years.

Estate and Gift Taxes in 2011, 2012 and Beyond

For decedents dying in 2011 and 2012, the Act greatly reduces the reach of the estate tax by granting estates a $5,000,000 exemption for property subject to the tax. In 2009, the last year in which there was an estate tax, the exemption was $3,500,000, so this is a significant increase. Estates that exceed the exemption threshold will be subject to a new 35 percent tax rate, which is a bit lower than the 45 percent rate that prevailed before 2010.

In addition, the Act introduces the concept of exemption “portability” between spouses. This means that if one spouse does not use all of his or her $5,000,000 exemption, the unused portion, with proper planning, apparently may be available to the estate of the surviving spouse. For example, if a husband dies in 2011 and his estate uses $2,000,000 of his $5,000,000 exemption, with proper planning the unused portion of the exemption ($3,000,000) may be added to the separate exemption of the wife when she later dies.

The gift tax burden also has been reduced. Since 2001, taxpayers have had only a $1,000,000 lifetime exemption for gift tax

purposes. That exemption is increased to $5,000,000 ($10,000,000 for a couple) for gifts made in 2011 and 2012, and the tax rate on 2011 and 2012 gifts in excess of that amount is 35 percent.

In 2013, the estate and gift tax rules generally revert to a $1,000,000 gift and estate tax exemption and a 55 percent tax rate.

The Generation-Skipping Transfer Tax

The Act makes a number of changes to the GST tax, which, to simplify things a bit, is an additional tax imposed on gifts and bequests to or in trust for grandchildren and great-grandchildren.

Going forward, the Act aligns the GST tax with the reformed estate and gift taxes. In 2011 and 2012, the GST exemption is increased to $5,000,000 and the tax rate is 35 percent. In 2013, the GST tax, somewhat like the estate and gift taxes, will revert to a $1,000,000 exemption (but with an inflation adjustment) and a 55 percent tax rate.

Planning Opportunities and Observations

A Window of Opportunity for Gifts. The existence of the $5,000,000 gift tax exemption ($10,000,000 for a couple) for 2011 and 2012 presents a “window of opportunity” for the making of substantial gifts. This is particularly important inasmuch as there is no certainty whatsoever that an exemption of this size will exist after 2012. Gifts might be made outright to or in trust for children, grandchildren, or other descendants. An individual contemplating a sizeable gift might consider making the gift to a “grantor trust” so that income tax advantages may be achieved as well.

Credit Shelter Trusts. A great many estate plans follow the typical pattern of dividing a decedent’s estate into two portions. The first portion usually is equal to the amount of the estate tax exemption then available and is paid over to a trust. The trust which receives this portion is sometimes referred to as a “credit shelter trust” or a “Trust B.” The second portion typically consists of the balance of the decedent’s estate.

The existence of the

$5,000,000 gift tax exemption ($10,000,000 for a couple) for 2011 and 2012 presents a window of opportunity, so to speak, for the making of

substantial gifts.

”

“

27

This second portion is often referred to as the “marital share,” or “Share A.” This second portion will be for the benefit of the surviving spouse inasmuch as it will be the decedent’s wish that this portion qualify for the federal estate tax marital deduction. In many cases the decedent’s estate plan will have been prepared at a time when the estate tax exemption amount was far less than $5,000,000. Consequently, the allocation of up to $5,000,000 of assets to the credit shelter trust (if the decedent dies in 2011 or 2012) may completely distort the decedent’s intentions. These types of estate plans should be reviewed to determine whether they continue to be consistent with the decedent’s wishes.

Portability. A number of questions exist with respect to the idea of portability. If an individual dies in 2011 or 2012, theoretically the individual’s unused exemption amount is portable to the decedent’s spouse. However, if the decedent’s spouse dies after 2012, a current reading of the law would suggest that the surviving spouse’s estate cannot take advantage of the first spouse’s unused exemption inasmuch as the portability rules, under the Act, cease to exist after 2012. Hopefully this will be addressed by legislation this year or next year, but obviously a degree of uncertainty currently exists.

It should be noted that in many cases it still will be highly preferable to use a credit shelter trust arrangement rather than relying on portability. First, if assets are left in a credit shelter trust, all future growth of the assets within the trust should be sheltered from the estate tax. Under the portability rules, the unused exemption of the first spouse is not even indexed for inflation. Second, portability does not apply with respect to the GST exemption. For couples with large estates who wish for the credit shelter trust assets to be exempt from the GST tax, portability will be of limited usefulness. Third, the use of the credit shelter trust provides a number of nontax advantages, including potentially the protection of the trust assets from the claims of creditors of the beneficiaries and the protection of the trust assets from the claims of a spouse of a beneficiary (including a new spouse if the decedent’s spouse is a beneficiary and remarries).

The Basis of Assets. If the first spouse to die creates a credit shelter trust for the benefit of the surviving spouse, the assets held in the credit shelter trust,

because they are not included in the surviving spouse’s estate for estate tax purposes, will not receive a stepped-up basis for income tax purposes upon the surviving spouse’s death. If the surviving spouse does not have an estate tax concern —which may be the case if, for example, the $5,000,000 estate tax exemption is available and that exemption would shelter all of the surviving spouse’s assets as well as the credit shelter trust assets—the estate of the surviving spouse may prefer that the trust assets be treated as a part of the surviving spouse’s estate for estate tax purposes so that the assets will receive a stepped-up basis. Proper planning and drafting with respect to the credit shelter trust arrangement perhaps can create the flexibility to allow these trust assets to be included in the surviving spouse’s estate, for estate tax purposes, if this appears to be the more appropriate alternative at the time of the surviving spouse’s death.

The Administration’s Budget Proposal

In February, 2011, the Obama Administration published its revenue proposals for the fiscal year 2012. Several of those proposals are worth commenting upon at this time.

First, the proposals seek to make portability permanent. If this becomes law, this would eliminate a bit of the uncertainty with respect to portability as mentioned above.

Second, the proposals seek to eliminate the ability to discount the value of an interest in a family controlled entity, such as a corporation or limited liability company, if the interest, either by gift or at death, passes to or for the benefit of other family members. It appears that these new rules would apply to transfers after the date of enactment. Proposals such as this have been made on a number of occasions in the past by both the Administration and members of Congress, but to date opposition to these types of proposals has prevented enactment. Whether this will continue to be the case remains to be seen.

Third, the Administration proposes that assets held in a multigenerational trust which under current law would be exempt from the GST tax (as a consequence of the allocation of GST exemption) will no longer be exempt after 90 years. In other words, upon the 90th anniversary, the GST exemption applicable to the assets of the

trust would terminate. In one sense, this is an effort to restrict the tax advantages that over recent years have been achieved as a consequence of many states’ changing their laws to allow trusts to continue to exist in perpetuity. Inasmuch as this proposal presumably would generate no additional taxes for 90 years, generally speaking, one must wonder how much interest will exist to implement this type of law.

Fourth, consistent with prior proposals, it is again being proposed that a grantor retained annuity trust (“GRAT”) have a minimum term of ten years. Inasmuch as the creator of a GRAT generally needs to survive the term of the GRAT in order to assure that the GRAT assets will not be included in the creator’s estate for estate tax purposes, presumably this would make GRATs far less desirable. This proposal would apply to GRATs created after the date of enactment.

SummaryThe old saying that the more things change the more they stay the same seems to apply to the estate, gift, and GST tax laws. The laws constantly change, but uncertainty and the lack of permanency stay the same. Nevertheless, the changes made by the Act do provide a very meaningful window of opportunity for some types of planning, such as substantial gifts in 2011 and 2012, and also suggest that a number of estate plans need to be reviewed to ensure that they are still consistent with the client’s wishes and still maintain adequate flexibility.

Bill Dennis is a Partner in Smith Moore Leatherwood’s Greenville, S.C. office. He is the leader of the Tax and Wealth Transfer Planning Team and a Fellow of the American College of Trust and Estate Counsel. He is a certified specialist in estate planning and probate law, and tax law, and has been listed for more than 10 years in The Best Lawyers in America® (Copyright 2010 by Woodward/White, Inc., of Aiken, S.C.) in Employee Benefits Law, and Trusts and Estates. He has also been selected by Law & Politics Magazine for inclusion in South Carolina Super Lawyers, Estate Planning & Probate, Employee Benefits/ERISA, Tax, 2010.

[email protected] 864.240.2406

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ith the gift tax exemption amount and generation skipping transfer (“GST”) tax exemption amount

increasing to $5,000,000 in 2011 and 2012 under the new tax law, the sale to the IDGT in return for a note has become an even more viable estate planning option.

Th e transaction looks something like this. Prior to the sale, you would establish a trust and fund it with a “seed” gift equal to at least 10% of the value of the asset sold to the trust. Th e initial “seed” gift will be subject to the gift tax, but the gift tax can be off set by your $5,000,000 gift tax exemption amount. Aft er the trust has been funded for a while, you would sell the discounted asset to the trust in return for a note that is usually less than nine years and is interest only with a balloon payment at the end. Th e “seed” gift and the sale are then reported on your gift tax return the following year, although there should be no gift tax due.

Th is strategy works best if the asset sold to the trust is an interest in a corporation, limited liability company, or limited partnership. If you own marketable securities or real estate, you could contribute these assets to a limited partnership or limited liability company (assuming there are valid business purposes to establish the entity), wait a while, and then sell an interest in the entity to the IDGT.

ADVANTAGESSome of the advantages of this estate planning option include the following:

1. If the asset is a non-controlling interest in a corporation, limited liability company, or limited partnership, the value of such asset may be discounted between 20% to 40%. Th e discounted amount of the asset and the appreciation on the asset should escape gift and estate taxation. Th is allows more of your gift tax exemption and estate tax exemption, currently $5,000,000 per person, to be used for other gift s during

lifetime or to shelter assets from the estate tax at death.

2. You have not departed with the entire asset because you receive a note from the trust equal to the value of the asset sold to the trust.

3. Th e interest rate on the note is at the favorable applicable federal rate (“AFR”). Currently, we are in an environment where these rates are at historic lows. For example, the interest rate for a nine year note for the month of March is 2.44%. If the assets in the trust appreciate at a greater rate than the interest rate on the note, you “win.”

4. Th e trust is structured in a manner so that you are responsible for payment of the income taxes associated with the trust. Th is allows the assets in the trust to grow without being depleted by income taxes. Your payment of the income taxes with respect to the trust is treated as a tax-free gift to the benefi ciaries of the trust but

A Sophisticated Way to Escape Gift Taxes

by Tod Hyche

There are some sophisticated estate planning options available that allow you to “freeze” the value of an asset and transfer the asset at a discounted value. One option is commonly referred to as a sale to an intentionally defective grantor trust (“IDGT”) in return for a note.

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by Tod Hyche

it does not count against your $13,000 annual exclusion or the $5,000,000 gift tax exemption. If you decide to discontinue paying the income taxes on the trust, the income tax burden can shift to the trust.

5. Since you are responsible for the payment of the income taxes associated with the trust, the sale to the trust is not subject to the income tax.

6. Th e trust can be structured so that it is a generation skipping trust. Th is should allow the assets in the trust to escape the transfer tax system so that there is no estate or GST tax when a benefi ciary dies. You can use your GST tax exemption amount, currently $5,000,000, in a way that should shelter the trust from the GST tax. Th e GST tax applies when an asset is transferred two or more generations below you so that the transferred property is subject to a 35% tax (this rate is scheduled to rise to 55% in 2013); however, if structured properly, the GST tax should not apply to the trust.

7. If the trust is established in a state that has the “rule against perpetuities”, the trust will have to end at some point. For example, if the trust is established in South Carolina, generally, the longest the trust could last is around 90 years. Many times it is benefi cial for you to establish a trust in a jurisdiction, such as Delaware or Alaska, that does not have the rule against perpetuities so that the trust, in theory, can last forever. Th is

type of trust is commonly referred to as a “dynasty” trust. In order to establish a trust in a state such as Delaware or Alaska, the trust must have a connection to such state, and one way to establish this connection is to name a trustee who is located in such state.

8. Th e assets in the trust should be protected from the claims of creditors and divorce, and the assets in the trust should be available to help provide for the benefi ciary for the rest of his or her life.

DISADVANTAGESSome of the disadvantages of this estate planning option include the following:

1. Although several parts of the Internal Revenue Code and Treasury Regulations must be pieced together to provide the support to substantiate this transaction, the IRS has not published specifi c guidance on how to structure each step of the sale to the IDGT, unlike other estate planning options such as a qualifi ed personal residence trust or a grantor retained annuity trust.

2. Th e IRS may disagree with the valuation of the asset sold to the trust. In the event that the asset is undervalued, the excess value would be treated as a gift which would have to be sheltered by your remaining gift tax exemption amount to avoid the gift tax. Th ere are certain ways to minimize the risk of undervaluation. For example, you could structure the sale with a “formula clause” by stating that the excess value will be contributed to a charity or a trust for the

benefi t of the surviving spouse. 3. If the return on the asset is not greater than the AFR rate, the transaction will be “underwater” and will accomplish no gift or estate tax savings.

4. Th e asset in the trust will have to generate enough distributions or income to pay off the note. If the asset does not generate enough distributions or income to pay off the note, the trustee of the trust could pay off the note by using the asset itself, but this is not the preferred option as you will be receiving a discounted asset.

Although there are some disadvantages to the sale to an IDGT, they are outweighed by the many advantages, especially in 2011 and 2012 when the gift tax and GST tax exemptions have increased to $5,000,000 per person. In the appropriate situation, you should seriously consider moving forward with the sale to an IDGT in return for a note in order to take advantage of all the tax and nontax benefi ts.

Tod Hyche is the Partner-in-Charge of Smith Moore Leatherwood’s Greenville offi ce. He is also a South Carolina Supreme Court certifi ed specialist in estate planning and probate law, and a Fellow of the American College of Trust and Estate Counsel (ACTEC). He has been selected by his peers for inclusion in Th e Best Lawyers in America® 2011 (Copyright 2010 by Woodward/White, Inc., of Aiken, S.C.), Tax Law, Trusts and Estates, 2007-2011; and by Law & Politics Magazine for inclusion in South Carolina Super Lawyers, Estate Planning and Probate, 2009 and 2010, Tax, 2010. | [email protected] | 864.240.2423

If the assets in the trust appreciate at a greater rate than the interest rate on the

note, you “win.”

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always a great idea!

or is it?by Fred Wood

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arbitration:

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usiness contracts are negotiated every day and each one presents the potential for a legal dispute. Should you deal

with a potential dispute ahead of time by including an arbitration clause in your contract? Not so fast. Today, arbitration clauses in business contracts have become so common that businesses are not giving the disadvantages of arbitration their proper consideration. Before you follow the arbitration trend, give the potentially signifi cant downside some thought.

It’s oft en said that arbitration is a great idea -so long as you win. Th e perceived benefi ts of arbitration generally are minimized expense and more predictable results. Not only do these benefi ts not necessarily bear out, but even if they do, it may come at the expense of your full rights. Consider the following reasons why arbitration, as opposed to litigation, is not always the right choice: Arbitration is not always cheaper. Like litigation, arbitration usually involves a fi ling fee and some expense for discovery. But, in addition, an arbitrator will charge you by the hour for his or her time, where a judge in court comes free. If you have a panel of arbitrators, the entire panel charges you. Arbitrator fees and case administrative fees, depending upon the tribunal, can mount quickly. Furthermore, arbitration typically has no procedure for disposing of the case short of a full hearing. Th us, even if arbitration may be less expensive when compared to a full trial, there is rarely any way to avoid going through a full-blown arbitration hearing because there is no mechanism for pre-hearing adjudication, even where appropriate.

Typically, arbitration does not provide the type of liberal discovery that traditional litigation does. Th ere may be some cost savings in this, but you may pay for it in other ways when you cannot get the information that you need, either from

the other party or from third parties, to properly prove your case. Plus, the cost saving is no guarantee as some arbitrators may use their considerable discretion to order discovery every bit as burdensome as is found in traditional litigation.

Arbitration rarely, if ever, off ers any right to appeal or vacate an award if a mistake, no matter how egregious, is made. Furthermore, the arbitrator, or panel of arbitrators, can be every bit as arbitrary as a judge or jury. Because the grounds for overturning an arbitrator’s decision are few and the chances of succeeding slight, you risk your entire fate in a single individual or small panel.

Procedural or technical defenses, such as the applicability of the statute of limitations, are less likely to be eff ective in arbitration because arbitrators are allowed to focus on fairness without having to follow the law. If you have a strong procedural or technical defense, you might be better off in court. Frequently, if victo ry for one side means a harsh result for the other side, arbitration has a reputation, well deserved or not, for “splitting the baby.”

An arbitrator’s decision, unlike a legal opinion, will not bar the fi ling of other lawsuits based upon the same or similar issues. Th is is a huge disadvantage if you prevail at arbitration and have a series of contracts that may give rise to the same or similar dispute in the future.

Enforcement of an arbitration award requires confi rmation by the court. Th is involves judicial intervention, and there is delay associated with this requirement. In other words, arbitration lacks any independent means of enforcement for a prevailing party.

Perhaps the most important thing to remember is that a decision to include an arbitration clause is likely your fi nal decision with respect to how a commercial dispute will be resolved. Public policy strongly favors parties resolving their disputes privately rather than in the courts. Th erefore, arbitration clauses will be enforced even if you decide later that you would rather litigate. So, a decision to arbitrate at the outset is one that you will have to live with.

If you choose not to include an arbitration clause, nothing prevents the parties from later submitting a dispute to arbitration if both sides agree to do so. Consider all your alternatives before following the trend toward arbitration. You may just want to preserve your rights and stick to the courts.

Fred Wood is a Partner in Smith Moore Leatherwood’s Charlotte offi ce. He has been recognized as one of Business North Carolina’s Legal Elite, Litigation, 2010, 2011, and by Chambers and Partners, USA, as one of North Carolina Leaders, Litigation, 2009, General Commercial Litigation, 2010.

[email protected]

BIt’s oft en said that

arbitrati on is a great idea—so long as you win.

The perceived benefi ts of arbitrati on might not

necessarily bear out, and even if they do, it may come at the expense of

your full rights.

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MistaKes eMployers MaKe tHat can lead to litigation

Sometimes getting through your workday is challenging enough in itself. Flurries of meetings, paperwork, emails and phone calls bombard us all, and amid the stress, it’s very easy to forget the essentials of the most basic HR practices. What is infi nitely more stressful, however, is your company being sued by a disgruntled employee. Th e following list serves to remind you of the fundamental ways you can protect your company (and how you can keep “testify in court” off your to-do list).

poorly draFted or inconsistently applied personnel policies: In addition to reviewing your policies periodically, you need to ensure that they are internally consistent, and that policies are based on and accurately refl ect the law (ADA, FMLA, etc.) It’s also extremely important to remember that no good deed goes unpunished. Inconsistent application of policies is the most fertile ground for plaintiff s in discrimination claims. Your good deed could be used against you.

unintentional ModiFication oF at-will eMployMent: Oral promises like, “You’ll always have a job here,” or “Keep up the good work and you’ll be promoted,” can get you into hot water. Th e failure to affi x appropriate at-will disclaimers in manuals or policies can also have consequences later. Breach of contract claims almost always go to a jury, so your best defense is to avoid inadvertantly creating an employment contract in the fi rst place.

MisHandling personnel docuMents and inForMation: Th e list of things that should be included in personnel fi les includes applications/resumes, performance reviews, employment contracts, corrective action memos, and signed employee acknowledgments. Th ings that should never appear in personnel fi les include medical information, I-9 forms, information about employees’ protected status, or potentially libelous material.

careless treatMent oF eMployee coMplaints: In addition to having a clearly written complaint policy, you should respond to complaints promptly, thoroughly and eff ectively. Maintaining as much confi dentiality as is reasonably possible, and involving only those who need to know are key. Assurance against retaliation is also essential.

by Peter Rutledge

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iMproper classiFication oF eMployees: Establishing whether an employee is classifi ed as exempt or non-exempt is so important to protecting your business. Th e calculation of overtime, disciplinary actions, and deductions for exempt employees are just a handful of issues impacted by improper classifi cation. Th e routinely problematic issue of independent contractor versus employee classifi cations can also result in large unexpected expenses down the road, even if a lawsuit is not on the horizon.

FMla land Mines: Th ree common failures that can land you in trouble include not designating the “rolling” 12-month period; not designating leave as FMLA covered; and not running FMLA leave concurrent with workers’ compensation leave. Also, you can require the use of paid leave during FMLA leave. Knowing where you stand on these issues can go a long way in preventing misunderstandings later.

MisHandling reQuests For reasonable accoMModation: Making reasonable accommodations requires interaction and understanding between you and your employee. Reasonable accommodations may inlude making facilities accessible; job restructuring/light duty; modifi ed schedules; leaves of absence; or special equipment. You don’t have to do precisely what the employee requests if you can determine another eff ective way to achieve his or her desired result. Th e important thing is that you try.

responding to eeoc cHarges: Responding to EEOC charges without the help of an attorney is certainly possible, but it is inadvisable. You could fi nd yourself locked into a position without the benefi t of legal advice, and the draft er becomes a critical witness. Also be wary of providing too much information, and the possiblity that you could inadvertantly waive available defenses. If you are responding to a charge, you are already in trouble. Don’t try to go it alone.

poor Hiring practices: Th is is a huge arena with lots of pitfalls, but the most critical ways you can protect your company include the development of accurate job descriptions; training of employees specifi cally on how to interview applicants; and the use of standardized interview and application questions that are related to the requirements of the job. Performing background checks and remaining consistent from one applicant to the next are also critical steps.

Failure to docuMent: “If it’s not in writing, it didn’t happen.” While the statement isn’t technically true, that is what juries will tend to believe. Th ey are also of the mind that if there was an important incident, you would have written something down about it. Be specifi c, accurate, and thorough. Have witnesses where appropriate and obtain signatures. Know how long you should retain your records, and what should be included within them.

iMproper classiFication oF eMployees:iMproper classiFication oF eMployees:Establishing whether an employee is classifi ed as exempt or non-exempt is so Establishing whether an employee is classifi ed as exempt or non-exempt is so important to protecting your business. Th e calculation of overtime, disciplinary important to protecting your business. Th e calculation of overtime, disciplinary actions, and deductions for exempt employees are just a handful of issues impacted actions, and deductions for exempt employees are just a handful of issues impacted by improper classifi cation. Th e routinely problematic issue of independent contractor by improper classifi cation. Th e routinely problematic issue of independent contractor versus employee classifi cations can also result in large unexpected expenses down the versus employee classifi cations can also result in large unexpected expenses down the

Th ree common failures that can land you in trouble include Th ree common failures that can land you in trouble include not designating the “rolling” 12-month period; not designating leave as FMLA covered; and not not designating the “rolling” 12-month period; not designating leave as FMLA covered; and not running FMLA leave concurrent with workers’ compensation leave. Also, you can require the use running FMLA leave concurrent with workers’ compensation leave. Also, you can require the use of paid leave during FMLA leave. Knowing where you stand on these issues can go a long way in of paid leave during FMLA leave. Knowing where you stand on these issues can go a long way in

Peter Rutledge is a Partner in Smith Moore Leatherwood’s Greenville, S.C. offi ce. In addition to employer counseling, he litigates business disputes, including claims for breach of contract, unfair competition, tortious interference with contract, and claims arising under the South Carolina Trade Secrets Act. [email protected] | 864.240.2410

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MistaKes eMployers MaKe tHat can lead to litigation

by Peter Rutledge

34

The Food Safety Modernizati on Act

a Fresh look at our Food supply chain?

he Food Safety Modernization Act (FSMA) was signed into law in January 2011. Th is legislation grants new powers to the Food

and Drug Administration (FDA) to regulate fruits, vegetables, seafood, milk products, and other non-meat food items. You may be surprised to learn that the regulation of meat, poultry, and some processed egg products, however, falls under the purview of the Food Safety and Inspection Service, a division of the United States Department of Agriculture, which remains unaff ected by this bill.

Th e last time Congress passed major legislation related to food safety was 1938, aft er which time food safety policy relied heavily upon random inspections at farms and food processors by FDA offi cials. In the event of a food contamination outbreak, the FDA relied upon food companies to voluntarily issue recalls and remove their products from stores. Th e new legislation gives the FDA the ability to recall contaminated food under its own authority.

In 2005, the FDA began requiring certain food facilities to maintain records on the sources, recipients, and transporters of their food products so that in the event of a “food emergency” food items could be traced from a retail shelf, back to a farm. (21 CFR §§ 1.337 and 1.345). You may remember the tainted peanut butter epidemic of 2008 when a salmonella outbreak in Peanut Corp.

of America’s Georgia processing plant may have killed eight and sickened hundreds more. Th is incident was an extreme example of a widespread, highly publicized outbreak that demonstrated the need to enforce existing food safety laws.

In March 2009, the Offi ce of the Inspector General (OIG), under the Department of Health and Human Services, published a report entitled “Traceability in the Food Supply Chain.” (You can view the document here: oig.hhs.gov/oei/reports/oei-02-06-00210.pdf) Th is report assessed two key issues: (1) the extent to which selected food facilities maintained the information required by the FDA in a food emergency, and (2) the traceability of selected food products in the event that contamination was found or suspected. Th e maintenance of adequate records would have shown both the sources of contamination and the distribution of food items.

Of the 118 food facilities studied, 59 percent did not meet existing FDA requirements to maintain records about their sources, recipients and transporters; and 25 percent were not even aware of the FDA’s records requirements

Th e report recommended, among other things, additional statutory authority to improve traceability of food products, and the development of standards for mixing raw food products from a large number of

“Traceability in the Food Supply Chain.” Department of Health and Human Services, 2009.Health and Human Services, 2009.

T farms. While the overwhelming majority of food companies exceeded the minimum standards required by law before the passage of this new legislation, the enforcement of laws against violators was known to be problematic.

Existi ng Laws Not Enforced

In April 2010, the OIG published a review of the FDA’s inspection program of domestic

Of the 40 food products traced through the food

supply chain:

5 were traced successfully through each stage of the supply chain

31 could only provide some informati on on faciliti es that were likely to have handled the food product

4 could not identi fy the faciliti es that had handled the food product

by Rob Moseley

35

food facilities. (You can view the document here: oig.hhs.gov/oei/reports/oei-02-08-00080.pdf) Th e report outlines that many food facilities went fi ve or more years without an FDA inspection, that there had been a signifi cant decline in the number of food facility inspections conducted by the FDA over a fi ve-year period, and that there had been a decline in the number of violations identifi ed by FDA inspectors. Furthermore, when violations were identifi ed, swift action was not taken to remedy violations.

In response to this report, the new legislation includes $1.4 billion to hire 2,000 new FDA inspectors over the next fi ve years. Every food producer with over $500,000 in sales is also required to adopt a food safety plan that includes an internal inspection system with detailed record-keeping. Small local growers are exempt from many of the requirements thanks to Democratic Senator Jon Tester of Montana, (also an organic farmer) who included an amendment exempting producers who sell less than $500,000 a year, and/or who sell mostly at local farmers markets.

As before, FDA inspectors must have access to all of the food producers’ records, and producers would submit to surprise FDA inspections. Th is bill piles on the paperwork for every sector of the American food chain, from farms and food manufacturers, to trucking companies, to grocery stores.

Impact on the Transportati on Industry

As part of the bill, the FDA is required to conduct a study of transportation of food in the United States in an attempt to determine the unique issues of safe food delivery to rural areas. Th is could include rules on co-mingling of food products and other cargo, trailer cleanliness, and standards for maintaining supply chain integrity (such as seals for trailers). Shippers and trucking companies are required to follow new rules regarding sanitary practices outlined in the bill within the next year and a half (though the vast majority of them already do.)

Recalls Under Suspicion of Contaminati on

As the new law allows the FDA to declare product recalls, mere suspicion or adulteration of contamination may lead to

recalls. Th is new law comes on the heels of a trend in cargo claim law in which a mere suspicion, without proof, of contamination, is considered by the shipper to justify destroying the entire shipment.

For example, in Atlantic Mut. Ins. Co. v. CSX Lines, LLC, plaintiff Atlantic Mutual, as subrogee of Pepsi, brought suit against CSX for damage to its cargo (phosphoric acid solution) that allegedly occurred while it was in transit. 432 F.3d 428, 430 (2nd Cir. 2005). While being transported, the phosphoric acid solution (shipped in three containers) was exposed to seawater. Id. Specifi cally, two of three containers became partially submerged, and the remaining container was fully submerged for nine hours. Id. While Pepsi accepted the two containers that had been partially submerged, it examined and ultimately rejected the third fully submerged container claiming the solution may have been adulterated and therefore unfi t for use. Id. at 431. Defendant CSX objected to Pepsi’s conclusion contending there was no evidence indicating that the containers containing the concentrate had been breached. Id. at 431. Th e district court granted summary judgment for defendant CSX fi nding that Pepsi’s test to determine whether there was contamination was insuffi cient to demonstrate liability. Id. at 433. Th e district court also excluded Pepsi’s test results altogether because defendant CSX was prohibited to independently examine the cargo. Id.

On appeal, the Second Circuit reversed. Specifi cally, the Second Circuit found that Atlantic Mutual had presented enough evidence demonstrating that the concentrate was damaged and retained no market value.

®Attorneys at Law

Id. at 436. In reaching this decision, the court suggested that the mere possibility that the concentrate had become adulterated under the Food, Drug and Cosmetic Act was suffi cient to deem the product unmarketable. As the court explained:

Atlantic Mutual has submitted uncontroverted evidence that the pails containing Pepsi Free concentrate, which were designed to be watertight, were submerged in seawater, that they were subjected to pressure which might caused their caps to loosen, and that the tab caps on the pails were rusted. Because this combination of factors creates a possibility that the contents of the pails may have been contaminated, Pepsi is precluded from being able to distribute their contents without fear of civil or criminal liability under 21 U.S.C. §331(a) (prohibiting the introduction…into interstate commerce of any food, drug, device, or cosmetic that is adulterated.)

Id. at 436. Accordingly, the court held that plaintiff Atlantic Mutual had made out a prima facie claim without proof of actual injury to the product. Id. 437. Th e new legislation will certainly not deter shippers from taking this “total loss” approach to shipments in which integrity has been compromised.

Higher Food Prices? While many key provisions of this new law take eff ect immediately, others will roll out over the next two to two-and-a-half years. We will undoubtedly encounter unexpected consequences of this new law, which potentially include higher food prices as the cost of regulation compliance gets passed on to consumers.

Rob Moseley is a Partner in Smith Moore Leatherwood’s Greenville offi ce, and the fi rm’s transportation team leader. He is also on the board of directors of the South Carolina Trucking Association, a member of the Safety & Loss Prevention Management Council of the American Trucking Associations and a member of both the National Truck & Heavy Equipment Claims Council and the Association for Transportation Law, Logistics and Policy.


This new bill comes on the heels of a trend in

cargo claim law in which a mere suspicion of

contaminati onjusti fi es destroying an

enti re shipment.

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When most people walk into a hospital or doctor’s offi ce, they don’t give a second thought to the fantastic amount of real estate required for basic hospital operations. Th ey almost certainly do not ponder whether the hospital is tax-exempt, the nature of leasing arrangements, liability issues, business structure decisions, regulation compliance or other headaches that come with the acquisition of property by a health care system. But careful consideration of these factors by hospital administrators is a kind of preventative medicine for the continued health of hospital operations.

The Pitfalls of Choosing a Business EntityNon-Profi t Health Care Organizati ons and Joint Real Estate Ventures

by Barry Herrin and Michael Lee

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ncreasingly, tax-exempt health care organizations are being creative in their choice of business entity for the purpose of joint ventures with

individuals and/or non-exempt parties (like doctors or ancillary services). However, joint ventures between tax-exempt hospitals and non-tax-exempt entities or individuals raise some very complex issues that, if not addressed correctly, can jeopardize the tax-exempt status of the hospital.

Many non-profi t hospitals are transferring the ownership of doctor offi ce space into separate companies in order to lease the space to doctors. Th ere are numerous advantages to this strategy. Health care organizations are oft en threatened by liability for injuries resulting from conditions on the property or from environmental hazards.

Two popular entity choices for non-profi t health care organizations wanting to create this type of leasing arrangement are the 501(c)(2) title holding corporation and the Single Member LLC. While both entities achieve similar results, they do so diff erently. Th e chart below provides a very basic comparison between entities.

It’s vital to note that either structure could have an adverse eff ect on an ad valorem property tax exemption that would be available with respect to the property if the

property is owned and used by the hospital. Many states are aggressively seeking to “undo” property tax exemptions of tax-exempt hospitals, so this is a hot-button area.

Lease transactions would also have to be evaluated in order to determine whether any of the lease income is subject to unrelated business income tax (“UBIT”). Th is area of the Internal Revenue Code requires an experienced eye to evaluate the consequences of specifi c choices.

Another potential pitfall for non-profi t hospitals to be aware of involves the formation of one of the entities mentioned above while facing uninsured or underinsured liability claims that threaten the organization’s real estate. Th e hospital might be at risk of committing a fraudulent conveyance, the illegal transfer of property or assets with the intention of avoiding a payment obligation.

Th ere are also countless laws and regulations to be aware of that are specifi c to health care, and to non-profi t organizations. Th e IRS oft en scrutinizes ventures of these kinds to ensure that they are not being used to benefi t private participants, particularly when those participants are insiders (or individuals with signifi cant infl uence over the health care organization).

As all of these factors in choosing a business

entity for joint ventures illustrate, the best preventative medicine for the well-being of a health care organization is oft en meeting with an experienced attorney, especially one that is a member of a health care industry team that routinely addresses not only real estate ventures, but also tax-exempt entities, regulation compliance, and litigation defense for hospitals and physicians practices alike.

Th is article was orginially published in the March 2011 edition of the Atlanta Hospital News and Healthcare Report.

Barry Herrin is a Partner in Smith Moore Leatherwood’s Atlanta, GA offi ce. He is also a Fellow of the American College of Healthcare Executives, the professional credential held by hospital CEOs and administrators.


Michael Lee is the Partner-in-Charge of Smith Moore Leatherwood’s Wilmington offi ce. He was selected as one of Business North Carolina’s Legal Elite, Real Estate, 2007, 2009-2011 and by Law & Politics Magazine for inclusion in North Carolina Super Lawyers, Real Estate, 2009-2011.

[email protected]

• A company that exists solely to hold ti tle to property. It is not an operati ng organizati on.

• Considered a tax-exempt organizati on by the IRS

• Turns over all the income it collects from the property (less expenses) to its exempt parent organizati on.

• A company requiring an operati ng agreement.

• Considered a disregarded enti ty for federal income tax purposes.

• Not treated as a separate enti ty for federal income tax purposes, and the single member reports the economic acti vity of the SMLLC as its own.

501(c)(2) Corporation Single Member LLCwHat is it?

wHat are tHe taX beneFits?

IThe Pitfalls of Choosing a Business Entity

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38orth Carolina voters cast one ballot for appellate judge posts in the recent election, but a unique run-off mechanism

ensured that one hotly contested race got multiple reviews from election officials. Thirteen candidates were vying to fill a Court of Appeals vacancy created when Judge Jim Wynn was elevated to a federal appellate judgeship. North Carolina election officials did not have time to stage a primary to narrow the field, so they chose to employ an Instant Runoff Voting (IRV) system that would provide a way to resolve the race without need for an additional, and costly, day of voting if none of the candidates secured a majority.

Voters were instructed to rank their top three choices from among the 13 non-partisan candidates. No candidate secured a majority of votes, but the IRV system provided a way for election officials to (somewhat) instantly declare a result – that the winner would be one of the top two vote-getters, incumbent Cressie Thigpen or former appeals judge Doug McCullough. The state re-examined the ballots of voters whose top choice was not either of the finalists, and in this review each candidate got an extra vote whenever a voter made one of them their next choice.

The results, of course, are important. Judge McCullough ultimately emerged the winner from the IRV review by 6,655 votes out of nearly 1.1 million cast. Judge Thigpen also ended up back on the Court of Appeals when Governor Perdue appointed him to fill a seat vacated when another judge won election to the state supreme court. A very influential court was bolstered by the addition of two experienced judges, but the process might get as much Monday morning quarterback thought as the result. The race was closely watched nationally by election officials and reformers, as it’s believed this was the first use of a ranking type runoff system in a statewide race in at least 70 years. Money, and citizen participation, were key considerations. A standard runoff, in which judges McCullough and Thigpen would have faced off again before voters, would have featured predictably low turnout and fully staffed voting locations across the state. The tab could easily have been in the millions for just a single race, and tough for state officials to contemplate with a looming budget gap that may exceed $3 billion. Meanwhile, reformers hoped IRV’s ranking process would result in a winning candidate who emerged from a process that reflected the preferences of a greater number of voters.

The final result, confirmed 48 days after the November election, was hardly instant. However, election officials were working with an entirely new system in a high-stakes statewide race and can hardly be faulted for caution in this initial IRV outing. Implementation of IRV was certainly controversial, and it seems likely that if it’s employed again state officials will enhance and clarify the instructions voters receive about the significance of their second- and third-place rankings. This election’s result does nothing to calm the long-simmering debate in North Carolina about whether popular elections are the right way to seat appellate judges. But as a first try at a more efficient and less costly way to resolve tight races, an election reform advocate summed it up well for the Associated Press: “It’s a pretty fair reflection of a fairly close race.”

Brad Risinger has extensive experience in state and federal court litigation involving business disputes, land use and zoning, product liability and the health care industry. He serves on Smith Moore Leatherwood’s Management Committee, and is partner-in-charge of its Raleigh office.


by Brad Risinger

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