“The time to repair the roof
is when the sun is shining.”
-John F. Kennedy
You entered into a pretty basic commercial deal, and decided to do things properly and get it drawn up by an attorney. You’ve now received a ‘draft’ from the attorney and it’s long. It was a simple deal. Why are there so many terms? Why is it several pages in length? The answer lies in risk-shifting, or preparing for the rain.
Contracts are generally signed in good times, when the sun is shining. The parties typically have high expectations of the success of the agreement and may not consider what happens if and when things don’t go as planned. However, it is important to prepare for the bad times, to formulate terms that consider risks that may arise after the contract is signed. There are many ways a contract can be drafted to guard against the rain – two of the more common ones are representations and warranties and indemnity provisions.
Representations and Warranties
A representation is simply a statement of fact upon which another party is expected to rely, while a warranty is a party’s assurance as to a particular fact coupled with an implied indemnification obligation if that fact is false. Representations and warranties are generally used to allocate risk by (1) apportioning exposure to potential losses and shifting risk from the recipient to the maker; (2) creating a direct claim against the maker if representations and warranties are inaccurate; and (3) serving as a basis for the parties’ indemnification rights.
An indemnification clause is a promise to protect and defend another in the event a particular set of circumstances leads to a loss suffered by another party. Indemnity provisions are the primary vehicle by which parties typically shift or apportion risk in a contract. Indemnity provisions may include any, or all, of three obligations to (1) indemnify, (2) defend, and (3) hold harmless the other party. A well-drafted indemnification provision allows parties to customize their risk allocation by shifting the burden of loss and compensating an indemnified party for risks it did not assume and expenses that may not be recoverable under common law, like attorneys’ fees.
Having an attorney draft or review your contract before signing is recommended. It is imperative that you understand the potential consequences of the risk-shifting provisions in any contract. By carefully drafting and negotiating a contract before execution, during the good times, you can best protect yourself or your company from the inevitable rain.
We’ve all heard the saying that there are only two things in life that are certain – death and taxes. The same might be said for your business that you’ve spent a good part of your life building. The difference is that the death of a business can be delayed or avoided all together and that depends upon how well you plan the passing of the business to a partner or the next generation.
Only about 30% of family businesses survive into the second generation and only about 12% into the third generation. For the most part, failures can be traced to one factor, little or no succession planning.
Succession planning, or, should I say, successful succession planning really boils down to creating continuity in management, culture and leadership in the midst of a change in ownership. It isn’t accomplished at an annual retreat or a planning session with an attorney, accountant or financial planner. It is developed and executed over a period of years.
Planning for a transition in the ownership of a family business has its own unique set of difficulties because you add family dynamics to the business dynamics. There are several key components to developing a successful plan that deals with family dynamics separately from the business dynamics. The key components to the development of a successful plan that deal with family dynamics are communication and trust. The key components to the development of a successful plan addressing business dynamics include culture, management and leadership.
The culture of a business is what defines that business internally and externally. It is the value system of the company and it establishes the reputation of the company within itself and the community. It defines the vision and goals of the company. Culture is what attracts and retains employees and customers. We all know that a big part of the reason why people do business with you is because they like you. Whether or not they like you more often than not depends upon culture.
Management of a company is not so much about who owns the company, but who will do the work of the business that makes it successful. The four areas of focus for management include administration and finance, operations and customer fulfillment, sales and marketing. More often than not in a family business, several of those areas are handled by you or another family member. While you may have developed the ability to handle each of those areas as you grew your business, turning over the reins of management of the company you’ve built requires that any person taking over one of those areas has the ability to hit the ground running. Before any business can be transitioned to the next generation, you must train those who will take over your responsibilities. You may be able to fill some areas with family members, but you might have to fill gaps in other positions with outsiders. More than likely, you are the individual who provides the leadership for the company and are the individual to whom everybody looks for direction. Before you can transition out of the business, you will need to find the individual or team who will take on that leadership role and give them the opportunity to position themselves in the eyes of all employees as the source of leadership and direction moving forward.
Assessing the abilities and competencies of employees and family members is a critical, but often awkward, part of succession planning. Not only must you find the right people, you must give them enough time to grow into their positions. Simply reaching a certain point in life and turning to a child and telling them that “it’s now your turn to make it or break it,” is a sure recipe for failure.
Finally, once the culture is clearly established, strong management is trained and in place, and leadership is established, you will have reached the point of being able to successfully “pass the baton” of ownership to the next generation. This is the point at which you complete the plan and set in motion your release of ultimate control to the next generation, whether in stages or all at once. Obviously, some control will be relinquished through developing and empowering management and allowing others to develop in leadership roles, but a change in ownership is really the transitioning of the ultimate control and responsibility for the business. A succession plan is as unique as each business and the owners of that business. There are many different tools available to the professional helping you develop your succession plan. They involve not only the structures for change in ownership, but also for providing incentives to retain key management and leadership and policies to create loyal employees.
The additional and unique nature of family dynamics in a business succession plan are more often than not accomplished through clear communication of the plan and the building of trust that the plan will be followed. Before the next generation can buy into any succession plan, they must first understand what that plan is. In addition, trust that the plan will be followed and executed can only be accomplished by the business owner fulfilling the promises and goals established by such a plan. Successful business succession planning is really most about preparation, common sense, communication and execution. It takes commitment to develop a plan and even greater commitment to follow it.
A DEEPER LOOK INTO TRADEMARKS
By: Shannan de Jesús
If you read the June article about trademarks and copyrights (or have some knowledge of intellectual property law), you know that a trademark (or service mark, but I refer to trademarks in this article for ease of reference) is a word, phrase, logo, symbol, color, sound, or smell that links your goods or services to your company and helps distinguish your product from those of your competitors. The more your customers see your trademark, the more they think of your business – and the quality of it. Indeed, if your customers are familiar with your trademark and have liked your products in the past, simply seeing your trademark on a new item might convince your customers that they will like that product before they even try it. This article takes a deeper look into trademarks, how to get them, and how to protect them once you do.
You may already know how important it is to run a clearance search before you start using a trademark. Without a doubt, a clearance search is critical to making sure you are not infringing on someone else’s rights when you start advertising your product. In fact, if you overlook this crucial step in the development of your business, you may spend a lot of time and money on something that you will later have to change. And, if you have to change your mark, you will be back at square one with branding, marketing, and letting consumers know that your new trademark represents your company and stands for quality. While it’s not completely failsafe, taking the time to do a clearance search can prevent future problems that would have been foreseeable with this easy, important step.
The clearance search can take many forms and is based in part on where you want to use your mark. A trademark can be registered in the state where the product or service is located, nationally with the United States Patent and Trademark Office (USPTO), or internationally. Depending upon how you want your business to grow and where you will reach your customers, you may want a basic state registration, federal registration, or registration in multiple foreign countries. A trademark clearance search is used to make sure that no one is already using the mark you want to use, in your industry, wherever you are.
A state search is simple and is limited to the geographic boundaries of the state where your product or service will be located. If you own a small home design business or diner, this might be a good option for you. But, don’t make the mistake of thinking that trademark registration is unnecessary if your business is limited to one state. Someone with the same (or very similar) trademark may have a federal registration – and may insist on you renaming your business or product if you use it.
A federal search is more detailed and like the state search, evaluates marks that are the same as, or substantially similar to, your proposed mark, but nationwide. This type of search also helps determine the likelihood that someone else will oppose your use of the mark, registration, or both. Remember that even if you don’t apply for federal registration, another trademark holder can stop you from using its mark and infringing on its rights. Federal clearance searches can include researching websites/domain names, other states’ registrations, and the USPTO database, including foreign word marks. This is a good option if you plan to expand your business, have an attractive mark, or have a popular product to sell.
Finally, if you plan to have an international customer base, you may want to register your mark in certain foreign countries, in addition to nationally with the USPTO. Some countries will not recognize the same protections offered by U.S. trademark law. It is important to understand what rights you will have if you want to offer your product or services outside the United States.
The USPTO Process
There are two basic ways to file for trademark registration with the USPTO: an intent-to-use basis, meaning you plan to use the mark, or a use-in-commerce basis. The process is generally the same for both types. It is important to note that there are deadlines throughout the process which must be met, or your application may be deemed abandoned and denied.
First, an examining attorney who works for the USPTO will review your application to determine whether there are grounds for denying registration (the mark does not contain the necessary characteristics to be eligible for registration, for example) or more information is needed. In that case, the examining attorney may issue an “office action,” which gives the applicant an opportunity to explain why the mark should be registered. The UPSTO may issue multiple office actions before making a final decision.
If the USPTO determines there is no initial basis for denying registration, it will publish the mark in the Official Gazette. During the publication period, any person or company who believes their rights will be affected if your mark is registered may file an opposition. If an opposition is filed, you will go through a process similar to a federal civil trial to determine your rights.
If no opposition is filed, the USPTO will issue a notice of allowance if the application was filed on an intent-to-use basis, and then you have to file “specimens” showing how your mark is being used before you can receive a registration number. If you were already using the mark and filed your specimens with your application, the USPTO will issue your registration. Again, it is important that you meet all deadlines and file all the necessary documents for the process to continue moving forward. An attorney who is familiar with trademark law can help you do this.
Protecting Your Trademark
Once you receive your registration, you will need to “police” your mark. One way to do this is by regularly reviewing the Official Gazette. However, that publication is limited to only marks that are pending federal registration. As such, it is important to be vigilant about watching for marks that are the same as, or substantially similar (and thus potentially confusing), to yours – in your neighborhood, state, and on the Internet. If you see a mark that looks like yours, you may need to take legal action to protect your rights. This is important for making sure your customers are not deceived by another company (and thus, making your company look bad) and to keeping your trademark rights.
Finally, if your trademark is registered on the principal register with the USPTO, you may also want to record your mark with the U.S. Customs & Border Protection (“CBP”) agency, especially if your goods will be sent to other countries, or you have other reasons to believe that your mark may be infringed. Counterfeiting is rampant, and the CBP works to keep out foreign imports that infringe on U.S. registrants’ rights.
If you are interested in securing a trademark, or have one you want to protect, the lawyers at Otis, Bedingfield & Peters, LLC have the resources and experience you need to help. We would be happy to talk with you. Contact us today.
In Colorado, whether or not probate is required depends on the type and value of the property a deceased person (“decedent”) owns when they die. All of a decedent’s property is classified as either probate or nonprobate property. Generally, nonprobate property includes property owned in joint tenancy with others, life insurance proceeds, contracts with payable-on-death (POD) provisions, and property owned by a trust. Probate property on the other hand is property owned by the decedent individually or with others but not in joint tenancy. As the name implies, nonprobate property is not part of any probate. If a decedent owns only nonprobate property, then there is nothing to probate and you do not have to go through probate.
If a decedent owns any probate property, however, whether you have to go through probate depends on the type and value of the probate property. If any of the probate property is real property, then you have to go through probate. Real property is principally land and buildings. If none of the probate property is real property, then the value of the probate property determines if you have to go through probate. If the probate property is worth less than $64,000.00, then you do not have to go through probate. Instead, the probate property may be distributed using an affidavit. The $64,000.00 threshold is accurate for 2015 and changes annually based on the consumer price index.
If probate is required, don’t despair. Probate is simply a statutory process to finalize the decedent’s affairs because the decedent is not here to do it on their own. Finalizing a decedent’s affairs includes collecting the decedent’s probate property, using that property to settle the decedent’s debts, and distributing the rest to those who are entitled (“beneficiaries”). Because the decedent is not here, a court appoints someone, called the personal representative, to finalize the decedent’s affairs under the court’s supervision. The personal representative has a fiduciary obligation to the decedent’s creditors and beneficiaries to hold the decedent’s probate property for their benefit. Probate ensures creditors and beneficiaries do not end up with more or less property then they should.
To start a probate, an interested person files a petition with the district court for the county in which the decedent last resided. An interested person includes the decedent’s spouse, children, beneficiaries and creditors. The petition, among other things, nominates someone to be the personal representative. Colorado law prioritizes who may serve as the personal representative with the highest priority going to whomever the decedent nominated in their will. If there is a will, the original must be lodged with the court. If the decedent did not have a will, the next highest priority is the decedent’s spouse, followed by any beneficiary, the decedent’s heirs, and lastly the decedent’s creditors. After the petition is filed, the court will appoint someone as the personal representative and issue letters showing the court authorizes the personal representative to handle the decedent’s affairs.
Part of the petition is to elect between formal or informal probate. Formal probate has more court oversight of the personal representative compared to an informal probate. It is up to the person filing the petition to decide between formal or informal probate.
Once appointed, the personal representative informs the beneficiaries and the decedent’s creditors of the probate and appointment. The Decedent’s creditors then have four months to let the personal representative know if the decedent died with a debt. The personal representative then collects the decedent’s probate property and files a list of that property with estimated values with the court. By the end of the four months, the personal representative knows about all of the decedent’s probate property and all of the decedent’s debts. The personal representative then settles the debts using the decedent’s probate property. If the probate is formal, the personal representative may need prior court approval before settling any debts.
Once the debts are settled, the personal representative distributes the decedent’s remaining probate property to the beneficiaries. If the probate proceeding is formal, the personal representative may need prior court approval. The personal representative will distribute the probate property according to the will, but if there is no will, then pursuant to statute described below
- The decedent’s spouse inherits everything if (1) the decedent died without parent or child, or (2) all of the decedent’s children are the only children of the spouse.
- The decedent’s children inherit everything if the decedent died without a spouse.
- The decedent’s parents inherit everything if the decedent died without a spouse or child. The decedent’s siblings inherit everything if the decedent also died without a parent.
- The spouse inherits the first $335,000 worth of probate property plus 75% of the remainder if the decedent died without a child but was survived by a parent. The parent inherits the rest.
- The spouse inherits the first $251,000 worth of probate property plus 50% of the remainder if all of the decedent’s children are also children of the spouse, but the spouse has children that are not children of the decedent. The decedent’s children inherit the rest.
- The spouse inherits the first $167,000 worth of probate property plus 50% of the remainder if the any of the decedent’s children are not children of the spouse. The decedent’s children inherit the rest.
The amounts above are accurate for 2015 and change annually based on the consumer price index.
Once the remaining probate property is distributed, the probate case may be closed. The process for closing the probate depends on whether the probate is formal or informal. One year after closing the probate case, the personal representative is relieved of the obligation to handle and care for the probate property for the benefit of the creditors and beneficiaries.
Many of our older clients are worried about two things – 1. Having the resources to afford long-term care, or qualifying for government assistance if they don’t, typically Medicaid; and 2. They want to leave their house to their heirs if it is one of their primary assets. These concerns are true even for reasonably healthy individuals.
These concerns lead to questions of strategies for those who own their homes and wish to live there as long as possible, but are concerned that one, or both (if they are a couple) will need expensive, long-term care in either an assisted living facility or a nursing home. Is there a way to continue to own your home as long as possible, qualify for Medicaid AND make sure the family home is passed on to the children? The short answer is that it is difficult to accomplish this goal without giving up ownership and taking actions which require long-term planning. This brief article will not explore all the avenues to both preserve assets to pass on to heirs and minimize your “countable” assets in qualifying to Medicaid assistance, but will provide a brief discussion regarding the family home.
The most common strategy many people will employ is to transfer ownership of the home to a child, but continue to live in the home. While this strategy can sometimes “work” – there are several potential problems with this course of action. First, Medicaid utilizes a look-back period for assets that were transferred within 5 years of a person applying for Medicaid. This means that if you transfer ownership of your home to a child (or children) and need to apply for Medicaid within 5 years of the transfer, Medicaid will impose a penalty period during which you will not be eligible to receive benefits. The period is calculated by dividing the value of the assets transferred by the average monthly cost of long term care in the state to arrive at the number of months you will be ineligible. Worse, the penalty period will begin running on the first day you start receiving services and would be eligible for Medicaid, but for the transfer.
The second potential problem, even if the 5 year look-back period isn’t an issue, is that you give up ownership of your home and it is now owned by someone else. While this can often work out just fine, sometimes we can’t always control events in our children’s lives. Events such as lawsuits, accidents, divorce and the loss of a job may put their ownership of “your” house in jeopardy.
You should be very careful in considering options for your home if you are worried about needing long-term care and talk with an attorney specializing in such matters before taking steps on your own.
Tim Brynteson is a partner with Otis, Bedingfield and Peters LLC in Loveland. Tim’s practice emphasizes on business transactions, real estate, business succession planning, estate planning, probate administration, and tax controversies and can be reached at 970-663-7300 or email@example.com.
At Otis, Bedingfield & Peters, LLC, we believe every client deserves the highest quality legal services from a law firm that is part of their community. We know we can’t be everything to everyone everywhere. That’s why we focus on providing only real estate law and business law services in the Northern Colorado region. Our commitment to real estate law and business law and our Northern Colorado community permeates everything we do. We value personal relationships, knowledge, integrity, trust and loyalty. Read More >>