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LAWatch
Vol. 16, No. 1 Winter 2005 (HTML Version)
Have you ever thought of adopting an adult, whether related or unrelated, for inheritance purposes? This is a question both for lawyers and nonlawyers. Most people are not aware that one can adopt an adult in Maryland. It can be a valuable tool for estate planning and inheritance purposes. Although the overwhelming number of adoption proceedings involve minors, Maryland law provides that any individual, whether a minor or an adult, may be adopted. There are good reasons to adopt an adult as part of a thoughtful and effective estate plan. First, persons who are adopted, even as adults, are generally treated the same as biological children of those who adopt them. An adult who inherits from an unrelated decedent must pay a 10% Maryland inheritance tax on the assets inherited. However, adult adoptees, just like biological children, are not subject to the state inheritance tax when inheriting from their adoptive parents. Second, if a decedent dies intestate (without a Will) and without a spouse, his assets will be distributed equally among his children, whether adopted or biological. Third, an adult adoption virtually insures that the adoptee will inherit from the adoptee’s adoptive parents, since the likelihood of a successful court challenge to the adoptee’s status is significantly diminished following adoption. While an adult adoption may make sense in the context of domestic partners who want to insure that their partner inherits, there are other sound reasons for an adult adoption, as in the case of a person who is childless but who wants to take advantage of provisions of a trust made by that person’s parents or grandparents. A recent case which Adelberg, Rudow litigated tested these principles of law and estate planning. In the 1960’s, Sam wrote a Will. He had a sizable estate worth many millions of dollars. In his Will, Sam left his multi-million dollar estate to a Trust. The initial Trust beneficiary was Sam, Jr., his only child. The Trust allowed Sam, Jr. to enjoy the income earned by the Trust. The Trust provided that upon the death of Sam, Jr., his child, Sam III, also would enjoy the income for his lifetime. The Trust further provided that upon the death of Sam III the Trust assets would be distributed to Sam, Jr.’s living descendants. The Will did not define “descendants.” The Will also provided that if after the death of Sam III there were no living descendants of Sam, Jr., the Trust assets would be distributed to certain charities. Sam died just three years after he wrote his Will. His adult son, Sam, Jr., survived him, but he died soon thereafter. Sam, Jr. was survived by his son, Sam III, who was just an infant. Sam III’s mother re-married. She had two more children, Aaron and Sarah. Sam III and his halfbrother, Aaron, and his half-sister, Sarah, were very close growing up together. Sadly, Sam III as a teenager was diagnosed with a disabling neurological disease, which confined him to a wheelchair. He never married, and he never had any children. Sam III was aware of the provision in his grandfather’s Will that the Trust assets would pass upon Sam III’s death to his children or to certain charities if he had no children. Sam III then adopted his half-brother and halfsister who were adults. He did so to insure that his grandfather’s estate would pass to them, even though Aaron and Sarah were not in Sam’s bloodline. Ten years later, Sam III died. Aaron and Sarah then asked that the Trustee turn the Trust assets over to them, since they were Sam III’s children as a result of the adoption. That set the stage for a battle between Aaron and Sarah on one side, who claimed to be the descendants of Sam, Jr., and the charities on the other side, who had been identified as alternate beneficiaries in the Will. The charities argued that they were specifically identified in the Will, and that the adoption was solely intended to divest them of the Trust assets. On the other hand, Aaron and Sarah argued that they had been lawfully adopted by their half-brother, that they should be granted all rights of inheritance other adoptees enjoy, and that Sam did not exclude them from inheriting because his Will did not provide that adoptees were not included among the class of persons who could inherit under his Will. Ultimately, the case turned on Sam’s intention, that is, whether he intended to include adoptees among the class of persons who could inherit under his Will. Significant was the fact that Sam was a lawyer, and that his Will was written in the 1960’s after adult adoptions had become legal. The case settled favorably pursuant to a confidential settlement. Prior to 1947, Maryland applied the “stranger to the adoption rule.” Under that rule, terms such as “children,” “issue,” and “descendants,” in a Will presumptively included, in addition to natural children, only children adopted by the person executing the document. If this were the rule in Sam’s case, Aaron and Sarah would not have inherited from his estate. However, in 1947, Maryland’s adoption laws were extensively overhauled. The “stranger to the adoption rule” was eliminated. One of the goals of Maryland adoption laws which became effective in 1947, was to give adopted children the same status as natural children. This also applies to adult adoptees. Maryland law now provides that unless a Will clearly indicates otherwise, the use of the word “child,” “descendant,” “heir,” or “issue,” or any equivalent term, includes an adopted individual (including adult adoptees), whether the Will was signed before or after the decree of adoption was entered. Maryland law also provides that the legal effect of an adoption of an individual who is an adult is the same as that of the adoption of a minor. Among other things, that also means that an adult adoptee (as with all adoptees) loses the statutory right, in the absence of a Will, to inherit from his/her birth parents. However, the birth parents still can leave their estate through their Wills to their naturally born child even when adopted by another. Use of the adult adoption law should be considered by lawyer and non-lawyer for estate planning purposes. For more information, call Kirk Kolodner or Yale M. Ginsburg at 410-539-5195.
Recently, the United States Supreme Court delivered a blow to victims of consumer loan fraud. Siding with the financial industry, the Court, in Koons Buick Pontiac GMC, Inc. v. Nigh, 125 S.Ct. 460 (2004), ruled that Federal Truth in Lending Act damages are limited to $1,000 for automobile and other personal property loans when the consumer cannot prove the actual amount of the harm suffered. The Federal Truth in Lending Act (the “TILA”) was enacted by Congress in 1968 as part of the Consumer Credit Protection Act. The purpose of the Act is to assure a meaningful disclosure of credit terms to the customer. The Act requires creditors to make certain disclosures to borrowers, including such information as finance charges, annual percentage rates of interest, and borrower’s rights. As originally enacted in 1968, the TILA provided for a statutory penalty of twice the finance charge collected by the creditor, in addition to any actual loss suffered by the consumer for a violation of the Act’s disclosure requirements. The 1968 law, however, capped the penalty at $1,000. Congress thereafter amended TILA in 1974, and again in 1995. The issue which the Supreme Court was called on to decide was whether these later amendments abolished the $1,000 limit. The case before the Supreme Court involved a claim filed by consumer Bradley Nigh against a northern Virginia automobile dealership. The dispute involved Nigh’s purchase of a used Chevrolet truck. After reaching an agreement for purchase of the truck with the dealership and paying several thousand dollars, along with a trade-in vehicle as down payment, Nigh drove the truck home. Later, however, Nigh was informed by the dealership that his financing did not go through. In addition Nigh discovered that he had been inappropriately charged in excess of $900 for a “silencer.” The dealership told Nigh that, as a result, he would have to put more money down for the purchase. Nigh, however, returned the car, and sued the dealership under both federal and Virginia law. A federal jury in Virginia ultimately awarded Nigh more than $24,000, which represented twice the amount of the finance charge imposed. The dealership appealed the decision to the United States Court of Appeals for the Fourth Circuit. At the initial appeal, the appellate court held that Congress’ amendments to the TILA eliminated the $1,000 cap for auto and other personal property loans, and allowed Nigh’s damage award to stand. The dealership then appealed this decision to the United States Supreme Court. On appeal Justice Ruth Bader Ginsburg, writing for the United States Supreme Court, ruled that the intermediate appellate court misinterpreted the statute and that the $1,000 cap still applied. As such, the high Court struck Nigh’s damage award. The Supreme Court’s decision to limit Federal Truth in Lending Act damages provided a sigh of relief to the financial services industry. According to some sources, the decision could save lenders as much as 1.1 billion dollars a year in increased damage awards in cases involving new car loans, and as much as 1.8 billion dollars a year in cases involving used car loans.
When looking at the prospect of a divorce or separation, we find many unknowns. Most people are unaware of the laws governing their situation. They look to attorneys and to the courts to make the most advantageous arrangement possible. However, litigation takes time and money. The courts and attorneys involved set timetables based on their schedules. When disagreements arise between the parties, costs escalate, and the court process creates winners and losers based upon the judge’s perception of the credibility of the evidence and witness testimony. Also, the proceedings become public record, allowing access to your most personal information. Mediation may be able to provide a better alternative in this stressful time. Traditionally, mediation was not looked upon favorably by divorce lawyers, who saw the problem as something to be handled by therapists. Today, due to increasing public awareness of the benefits of mediation, many divorce attorneys have become mediators as well. Mediators do not make findings of fact or law, but meet individually and jointly with the parties in attempts to resolve their disputes. They do not decide issues, but help to define and redefine them. Mediation is more flexible and more creative than litigation as the mediator can work with the parties to explore alternatives that they may not have considered on their own; and it takes personalities out of the dispute by offering choices instead of blame. You can move at your own pace with minimal disruption to your schedule. Another advantage to mediation is that the information exchanged between the mediator and the parties is kept confidential. Mediation allows you to be in control of your own destiny. If you are in a situation where separation or divorce seems inevitable, and you need to work out the details regarding division of assets and visitation and custody matters, mediation may be more responsive to your needs than litigation. Should you decide that the matters cannot be resolved through mediation, you can then turn to the courts to resolve the dispute. If you have any questions as to whether mediation would be right for you, please call.
UNDERSTANDING GROUND RENT Ask residents of Baltimore what they like most about Charm City, and the answer you will not hear is “I love being a home owner and still paying rent.” This is a situation that many Baltimoreans find themselves in. Baltimore is one of the few cities that long ago utilized the concept of a ground rent to help make housing affordable. Although the concept is not as widely used today in new developments, many homeowners are still purchasing their homes subject to an existing ground rent rather than without one. To first time homebuyers and some lenders, the idea of paying a ground rent is a complete mystery. Many worry about the ground rent system and the remote possibility of losing their home; and although it is not a common situation, it is one that you do not want to find yourself in. Therefore, to protect yourself and your home, the best advice is to pay your ground rent timely. However, if you find yourself in a situation where your home is at risk because you cannot locate the ground rent holder and thus do not pay the rent due, be aware that you may be responsible for the costs associated with the collection process. Under recent legislation that went into effect on October 1, 2003, if a ground lease is in arrears for at least six months, the ground rent holder is entitled to bring an action for possession, once the building owner is provided with notice before any action can be taken. The new legislation requires the ground rent holder to provide 45 days notice of the delinquency, compared to 30 days under the old law. The ground rent holder must provide notice of the outstanding bill to the building owner by certified mail, return receipt requested. In addition, the new law now requires the ground rent holder to provide notice by first class mail to the title agent or attorney identified on either the deed or the intake sheet recorded with the last recorded deed. The new law also codifies the maximum expenses the ground rent holder is entitled to claim. If the ground rent is paid before the ejectment proceedings begin, the holder is entitled to recover actual expenses, not to exceed $500, incurred in the collection of the past due ground rent. These actual expenses include the title abstract and examination fees, judgment report fees, photocopying and postage fees and attorneys’ fees. In addition, if the ground rent holder proceeds to file an action for ejectment because the ground rent and allowable expenses have not been paid, the ground rent holder is entitled to recover the additional reasonable expenses incurred in the preparation and the filing of the action. These expenses include the filing fees and court costs, expenses incurred in the service of process or otherwise providing notice, a maximum of $300 in additional charges for the title abstract and examination fees, and reasonable attorneys’ fees not to exceed $700, and taxes, including interest and penalties, that have been paid by the holder of the ground rent.
Every day many in Maryland are shocked to receive notice from the Comptroller of the Treasury seeking to recover unpaid sales tax, interest and a hefty penalty. Many of these recipients never participated in the management or operations of now long defunct companies and are surprised to learn that they could be liable for unpaid sales taxes. The problem is that, for whatever reason, many people find themselves as “silent partners” in small business ventures with family, friends, or others. While some may never expect to see any return on their investment, no one ever expects to receive a collection notice from the State in return for their investment. Unfortunately, in an age of corporations, limited liability companies, limited liability partnerships, (and don’t forget, the limited liability limited partnerships), people have grown accustomed to the concept of investing with “limited liability.” What this means for most people is that their potential loss is limited to only the amount invested in the business and creditors cannot come after the investor to get more money. However, one of the most critical exceptions to this general understanding is liability to the State for unpaid sales and use taxes. HSJones@AdelbergRudow.com Not so surprisingly, when businesses begin to fail, businesses become delinquent in their payment of sales and use taxes. Under Maryland law, personal liability for these tax payments is extended to the president, vice president, treasurer, and any other officer who directly or indirectly owns 20% of the stock of a corporation. Additionally, in the case of limited liability companies, all members are potentially liable for unpaid sales and use tax if there is no operating agreement. Even if there is an operating agreement, those members who actively manage the company become personally liable. HSJones@AdelbergRudow.com Knowing that limited liability may be not so limited makes setting up new business and winding down old business even more critical. Here are a few suggestions: (1) do not accept any titles if you are not going to actively participate in the company’s management; (2) regardless of your level of participation, make sure you review every annual personal property tax return (Form 1) before it is filed to ensure that you were not mistakenly identified as an officer; and (3) make sure failing businesses are properly wound down and dissolved under Maryland law. If you would like more information or help in these areas, please give us a call.
Clients often have pre-determined ideas about litigation. Feeling victimized, they want to sue and exact retribution from the offending party. While litigation sometimes is the only course to pursue, there are alternatives to litigation. Mostly, however, one must evaluate his or her circumstances and decide, with the help of his or her lawyer, the best plan of action in light of the situation. Do I want to litigate? Before suing, consider mediation and arbitration - two methods of alternate dispute resolution (ADR) that have greatly gained in popularity in recent years and are worth considering. Mediation is often the simplest, most inexpensive and least formal way to resolve a dispute. As the name suggests, mediation simply involves presenting the issues to a neutral third party. This mediator is usually a lawyer trained in mediation, and often is a retired judge. Mediators usually have experience in the types of disputes that come before them and can objectively evaluate the strengths and weaknesses of both sides. The mediator acts as a broker between the parties and helps both parties amicably resolve the dispute. Mediation can be initiated before suit is filed or even after suit has been filed. In fact, if suit is filed in federal court in Maryland, mediation can be ordered by the court or requested by the parties and is conducted by a United States Magistrate Judge. Arbitration is more formal than mediation, but usually is less complex. Arbitration often is agreed to between parties in contractual relationships, and is quite common in certain business relationships. For instance, the majority of construction contracts contain arbitration clauses that require the parties to submit any controversy to binding arbitration. Many companies now require that any dispute which arises be submitted to arbitration. Arbitration can be before one arbitrator or a number of arbitrators, and usually follows written requirements as to how the arbitrator conducts the arbitration. While typically less costly than litigation, some arbitrations can be quite expensive. How much can I expect to spend? This is a question that always needs to be discussed before instituting litigation. What one can afford to pay and what the resolution of a dispute might cost may vary significantly. Always consider the alternatives to litigation. While it is usually impossible to predict what litigation will cost, there are some guidelines. Proceedings in the state district courts (which have limited jurisdiction) are usually less complicated and therefore less expensive than proceedings in the state circuit courts. Federal court typically involves more legal issues, which can increase the cost substantially. Also, keep in mind that attorney fees are usually not recoverable in most controversies and that other costs, such as expert witness fees, may also be necessary. These costs should be measured against any potential recovery. What is required of me? The client and attorney should work as a team. The client will be required to provide information throughout the lawsuit. For some, this interaction is welcomed; for others, however, this will take away from business or personal commitments and become an unwanted intrusion. While these are just a few of many issues to consider when deciding if litigation is the best course, they are topics that should be discussed frankly and openly. Litigation is sometimes necessary; making an informed decision is always necessary. At Adelberg, Rudow, we make sure each litigation matter is handled pursuant to a written engagement agreement because it is important that our clients understand the financial cost of litigation.
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ADOPT AN ADULT?
HIGH COURT LIMITS RECOVERY UNDER FEDERAL
DIVORCE MEDIATION – CONTROL YOUR OWN DESTINY
NOT SO LIMITED LIABILITY
by H. Scott Jones
QUESTIONS TO ASK BEFORE FILING SUIT