Get Answers to Your Highest Priority South Dakota Legal Questions
Have questions? We have answers! Our South Dakota attorneys answer the questions they hear most often from clients just like you.
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How does a "step-up" in basis work?
Our law firm recently received this question from one of our clients:
“After my husband passed away in November 2012, I sold the cattle and most of the farm equipment. I'm now wondering how all will fall out as relates to depreciation. Of course, the sale price was less than when purchased new. Example: Used 1999 Dump Truck on IRS depreciation @ $7,000 in 2004; had to sell for $1,000 for salvage/parts as repair costs exceeded any greater sales value.”
This is actually a fairly common question. When a person passes away, any assets owned by them will get stepped up to fair market value as of the date of death (or stepped down if the asset is worth less than its adjusted tax basis). If the asset is owned jointly with their spouse, then in most cases, the half owned by the person passing away will get the step up and the other half will continue to be depreciated by the surviving spouse.
For those assets stepped-up in basis you will begin to depreciate them using the class lives called for by the tax rules (sorry, no bonus depreciation or Section 179).
The nice thing about these rules is that you do not have to go back and try to find out what they originally paid for an asset (if not on the depreciation schedule). The only documentation required is how you arrived at the fair market value of the asset.
In the example of our reader, even though they paid $7,000 for the Dump Truck and most likely fully depreciated it, they would most likely use $1,000 as their FMV value. If this is not a community property state, then $500 would be their cost basis since the surviving spouse had fully written down her cost to zero. In a community property state the basis would be a $1,000 and no gain or loss would be recognized.
Remember that this step-up applies to harvested grain that has not been sold. If you have sold the grain on a deferred payment contract and have not received the cash yet, this does not get a step-up since it is considered “income” and income items do not get a step up.
Who should form a limited liability company in South Dakota?
You should consider forming a limited liability company ("LLC") if you are concerned about personal exposure to lawsuits or debts arising from your business. For example, if you decide to open a business that deals directly with the public, you may worry that your commercial liability insurance won't fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better, because it gives you personal protection against these and other potential claims against your business.
Does my South Dakota limited liability company need an operating agreement?
Although South Dakota's LLC laws don't require a written operating agreement, you should have one. Here's why an operating agreement is necessary:
- It helps to make sure that courts will recognize your personal liability protection by showing that you have been careful about organizing your LLC as a legitimate business.
- It sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.
- It helps to alleviate misunderstandings among the owners over finances and management.
- It allows you to create your own operating rules rather than being governed by South Dakota's LLC "default" rules, which might not be to your benefit.
What is a member-managed limited liability company in South Dakota?
When you form a South Dakota limited liability company (“LLC”), you will need to decide how your LLC will be managed. The most common form of LLC management is the member-managed LLC where all the members (or owners) participate in running the business.
In South Dakota, A Member-Managed LLC Is The Most Common Choice
Most people who set up an LLC in South Dakota choose member-management, meaning that all the members share responsibility for the day-to-day running of the business. This approach is more common in part because most LLCs are small businesses with limited resources and they don’t require a separate management level to operate. Unlike corporations, LLCs have a streamlined organizational structure, without officers or boards of directors. As such, the LLC form is often chosen by people who want to be directly involved in managing and operating their business.
If you and the other members of your LLC want to run your own business - actually make and sell products, take orders, provide services - then you will probably want a member-management structure for your LLC. For example, if your LLC is a bakery and all your LLC members want to play an active role in the business -- crafting recipes, baking goods, hiring employees, opening and closing the shop -- then you will want to operate the LLC as member-managers.
What is a South Dakota limited liability company?
In South Dakota, a limited liability company, commonly known as an "LLC," is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Similar to owners of partnerships or sole proprietorships, LLC owners report business profits or losses on their personal income tax returns; the LLC itself is not a separate taxable entity. However, like owners of a corporation, all LLC owners are protected from personal liability for business debts and claims -- a feature known as "limited liability." This means that if the business owes money or faces a lawsuit, only the assets of the business itself are at risk. Creditors usually can't reach the personal assets of the LLC owners, such as a house or car. (Both LLC owners and corporate shareholders can lose this protection by acting illegally, unethically, or irresponsibly.)
For these reasons, many people say the LLC combines the best features of the partnership and corporate business structures.
What are South Dakota Powers of Attorney and Living Wills?
Of course, your will does not take effect until your death. However, other estate planning documents (known as “advanced directives”) may be useful during your lifetime.
A Durable Power of Attorney for Health Care is a document that you, as the “principal,” create by appointing another person, the health care “agent” or “attorney in fact,” to make health care decisions for you should you become incapable of making them yourself. This type of power of attorney is “durable” because it is effective even if you become incapacitated. It is important to note that your “agent” or “attorney in fact” does not need to be a licensed lawyer. In fact, you can name anyone to serve in this role.
A Living Will is a document that instructs your physician and other health care providers as to the circumstances under which you want life-sustaining treatment to be provided, withheld, or withdrawn.
Similar to a Durable Power of Attorney for Health Care, a Durable Power of Attorney (Financial) is a document that you, as the “principal,” create by appointing another person, the financial “agent” or “attorney in fact,” to make financial decisions for you should you become incapable of making them yourself. Once again, it is important to note that your “agent” or “attorney in fact” does not need to be a licensed lawyer. You can name anyone to serve in this role.
You should resist the temptation to use “simple forms” that you may find in a book or on the Internet. South Dakota has particular requirements for advanced directive documents. You should work with your attorney to draft these documents so that they are valid in South Dakota.
What is jointly-owned property in South Dakota?
Not all of your property may be probate property. In other words, your will may not control all of your property. One example of non-probate property is jointly-owned property. Because the different types of jointly- owned property are treated differently for probate purposes, it is important to know what type of jointly-owned property you have.
Title to property is equivalent to ownership. If property is titled only in your name, you are the sole owner. If property is titled in more than one name, it is jointly-owned property. In South Dakota, the most common types of jointly-owned property are joint tenancy with the right of survivorship and tenancy in common.
If you obtained real estate in South Dakota during your marriage, your property is most likely owned as a joint tenancy with the right of survivorship. Under a joint tenancy with the right of survivorship, each owner effectively owns the whole asset. In other words, each owner shares ownership equally. If one owner dies, the other owner acquires the deceased owner’s interest automatically.
If you own real estate in South Dakota with someone other than your spouse, you usually have a tenancy in common. Under a tenancy in common, each owner holds his share of the asset outright. Under this ownership structure, there is no need for there to be “equality.” For example, you might own 60%, and your brother would then own 40%. If your brother dies, his interest in the property will be distributed in accordance with the directions in his will. In other words, your brother’s interest does not pass automatically to you as the remaining tenant in common.
You may also own bank accounts with another person. Similar to real estate, most married couples have a joint account with the right of survivorship. During your lifetime, the other joint owner can access the account. At your death, your will does not control this joint account and the entire account will belong to the surviving joint tenant.
Under some circumstances, you may not want to give another person access to your bank account during your lifetime, but you do want that account to go to a designated person at your death. By naming a beneficiary in this way, the designated beneficiary will get the account’s funds at your death no matter what your will says.
You may also own stocks or bonds jointly. Once again, if you own stock jointly with right of survivorship, it passes automatically at your death to the surviving joint tenant and does not transfer under your will. On the other hand, if your stock is owned jointly with another person as tenants in common, your share or interest in the stock will pass under your will.
Finally, there are some assets that allow you to designate a death beneficiary. Today, many South Dakotans have some type of life insurance or retirement plan. Most life insurance policies and retirement plans allow you to designate a death beneficiary. These arrangements are contracts that provide how the benefits will pass at your death. These benefits do not become part of your probate estate (unless you name your estate as the beneficiary).
What is a will and what does it do for you?
A will directs how you want your property to be distributed when you die. In South Dakota, anyone who is at least eighteen years old and of sound mind can make a will. A will does not take effect until you die. Also, as long as you are of sound mind, you can change your will as often as you want.
In South Dakota, a will always needs to be in writing. A will written in your own handwriting is called a holographic will. South Dakota will recognize this type of will under certain circumstances. However, our law firm does not recommend that you write your own will. These wills are frequently unclear, incomplete, and poorly written. A better option is a will that is properly witnessed, known as an attested will. An attested will, with a special notarized affidavit, is a self-proving will. Our law firm recommends that you have a properly written, attested, and self-proving will.
Your will can do many things. First, your will can direct how your property will be distributed after you die. Second, you get to name the persons that will take your property, known as the beneficiaries. Third, you can provide for several contingencies because you do not know who will be living at the time of your death.
Here’s an example: Presume that you are married and have five children. You probably want to leave everything to your spouse. However, if your spouse dies before you do, then you could leave everything to your five children. You could also decide what would happen if one of your five children dies before you. Do you want that deceased child’s share to go to your remaining children or to your child’s spouse or children (your grandchildren)? What happens if you have no surviving spouse or children – is there a charitable organization that you want to honor through your will?
Another benefit of a will is that you get to choose your personal representative. The personal representative is the person who manages your estate. Under South Dakota law, your personal representative has four main duties: (1) to gather your assets, (2) to protect your assets, (3) to pay your debts and expenses (including any taxes), and (4) to distribute the remaining assets to your beneficiaries.
You may name more than one person to serve as the personal representative. These persons are called co-personal representatives. This structure may work in some cases. However, because both co-personal representatives often have to agree on all decisions (and sign everything) it may create more problems than it is worth. You should definitely discuss this co-personal representatives issue with your attorney.
For young families, another important benefit of having a will is that you can name the person you want to serve as the guardian of your minor children. For the parents, this is often the most difficult estate planning decision to make. The guardian is the person you designate to raise your minor children until their eighteenth birthdays. South Dakota courts will normally follow your will’s guardianship wishes.
A will also allows you to establish a trust and name a trustee. A trust is a legal arrangement that divides ownership of property into two parts: legal ownership and beneficial ownership. The trustee is the person who holds the legal ownership of the property. The trustee controls and manages your property according to your instructions for the benefit of your beneficiaries, who hold the beneficial title to the same property.
Here’s an example of how a trust could work: Presume that your will leaves everything to your spouse. In the event that your spouse dies before you do, your will leaves everything to your five minor children. Because your five children are minors, the state Circuit Court will need to appoint a guardian to manage your children’s finances. Under South Dakota law, the guardian may be required to file a financial accounting with the state Circuit Court. Sometimes, the guardian must get the state Circuit Court’s permission to spend money for the children. Perhaps most alarming is that as soon as your minor child turns eighteen, the child receives his estate share outright. Of course, most eighteen year-olds are not mature enough to handle this kind of major financial responsibility.
A trust, however, allows you to designate whether or not the trustee must post a bond or file accountings with the state Circuit Court. You can also grant the trustee discretion as to how to spend or invest the trust assets and designate the age that the trustee can provide the property to your children. For example, you might postpone distribution until at least age thirty, or sometimes half at age thirty and half at forty. In other words, your trustee can make sure that the funds are used sensibly, such as to pay for a child’s college education, before your trustee has to turn the property over to the child.
What is your "estate"?
Many people believe that the term “estate” only applies to the wealthy. However, in reality, almost everyone has an “estate.” Your estate is all of your property – your home, real estate, savings, bank accounts, life insurance policies, furniture, retirement plans, personal property and everything else you own. In other words, if you own property, you have an estate.
Your entire estate is made up of your probate estate and your non-probate estate. If you die with a will, you have died testate. If you die without a will, you have died intestate.
In South Dakota, probate is the process of proving a will’s validity before the state circuit court. Probate is done so that your assets can be properly administered and distributed. You should keep in mind that even if you die intestate (without a will), your assets still need to be administered and distributed through probate.
The assets that go through probate make up your probate estate. These are usually assets that are titled solely in your name and come under the control of your personal representative (formerly known as an executor). For instance, real estate, stocks and bonds, bank accounts, and vehicles are part of your probate estate if they are titled only in your name.
On the other hand, when you die, some of the assets that you own may be distributed to others without regard to your will and outside of the probate process. These assets pass directly by operation of law or by contract and make up your non-probate estate. For example, an asset that you own jointly with another person (such as real estate or a bank account) may pass directly to the surviving joint owner upon your death by special legal rules.
Other types of non-probate assets, such as life insurance or retirement accounts, allow you to designate a beneficiary. These assets will then be distributed to your beneficiary when you die. In other words, some of your assets may not be controlled by your will or the probate process.
What is negligence in South Dakota?
Negligence is the legal term for any careless behavior that causes, or contributes to, an accident. For example, a person is negligent if he neglected to stop at a stop sign and, as a result, hit your car as you were coming through the intersection.
A person can be considered negligent whenever he or she had a duty to act carefully and failed to do so. (Generally, we all have an obligation to act with ordinary and reasonable care in any given situation -- that is, in a manner that will not foreseeably injure those around us). For example, a person who drove at night wearing sunglasses would be negligent, because any reasonable driver would know that doing so would increase the chances of causing a traffic accident.
For most types of accidents, a person must be found negligent in order to be held legally responsible for another person's injuries. If a person behaves negligently and that behavior causes you harm, you can most likely recover compensation for your injuries.