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The Ever Expanding World of Nonprofit Organizations

When you listen to the news, you will hear politicians arguing about whether the economy is growing at a sufficient pace. Perhaps the accusation is that the economy is worsening, or the economy is growing but too slowly, or the economy is fine today but will take a major downturn in the future. The truth is, if we knew exactly what the economy would do, more people would become more active in the market. But when there is a lack of confidence in the market, people are hesitant to risk major investments in business. This is the type of economic talk we have heard from the pundits for the last several years. And, like it or not, that discourse will continue for as long as we have an economy.

But while some may have hesitated to risk starting a small for-profit business in the last decade, the world of nonprofit organizations has expanded at an astounding rate. In Indiana, the number of 501(c)(3) tax exempt public charities increased by 39.8% between 2003 and 2013. Now Indiana has at least 23,963 501(c)(3) tax exempt nonprofit organizations. Nationally, during the same time period the number of 501(c)(3) tax exempt public charities increased by 35% so that there are now at least 1,056,912 such organizations. To say the least, Hoosiers, and Americans in general, are becoming more community focused through charitable organizations.

The benefits of forming a nonprofit organization for charitable work are tremendous. From a tax standpoint, a nonprofit organization—if it is planned strategically—will be eligible for tax exempt status. Tax exempt status means that the organization will not have to pay federal or state income tax. In addition, the nonprofit organization may apply for an exemption from state sales tax. Moreover, the contributions to the nonprofit organization may be tax deductible under IRC § 170. Simply stated, the Indiana Code and the Internal Revenue Code are written so as to encourage community members to start non-profits.

And that’s merely the tax benefits.

Think about how much good a non-profit organization can do in the community. Charitable organizations might provide scholarships to those who cannot afford to attend college. Other organizations may conduct scientific research to find a cure for cancer. Still others might provide a safe place for students to escape the violence on the streets. Indeed, the possibilities are endless.

The Declaration of Independence and Business Formality

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."
-Declaration of Independence, July 4, 1776

The Declaration of Independence is among the greatest pieces of writing in human history. The words of these documents have undoubtedly changed the "Course of human events," founding a nation and structuring a government that has done untold good on this earth. Because a nation began on July 4, 1776, American citizens have saved the world from the evils of Nazism and Communism, leveraged prosperity to deliver aid in times of disaster in developing countries, and welcomed immigrants seeking a place to work and raise a family. Yes, we have not always done what was right, but on this July 4th holiday, let's remind ourselves of this: we are a great nation, and one of our most treasure documents has much to do with that.

The Declaration is more than some eloquent words written with excellent penmanship. Indeed, it is a legal document whose significance parallels business organization law. More specifically, the Declaration serves as our nation's articles of incorporation.

In business law articles of incorporation are necessary for the government to recognize the formal existence of the organization, its incorporators, and the powers the business will enjoy. For example, in Indiana if a group of individuals wishes to start a plumbing business, the group must file paperwork (the articles of incorporation) stating  the name of the corporation. In addition the group of aspiring business owners may set forth in the articles of incorporation the purposes for which it is incorporating, such as to conduct any lawful business. The language contained in the articles of incorporation is somewhat flexible, but the words contained in the articles are of utmost significance.

The words are significant because they cannot be undone haphazardly. Now the organization is not just subject to federal and state law, but also to the law of the corporation itself, namely its articles of incorporation. Returning to our example of the plumbing corporation, once the name and purpose of a company are stated in articles of incorporation, they are in essence "set in stone." The only way to change them is to amend the articles of incorporation, which can be a major procedural problem in the business.

So how does the Declaration serve as our nation's articles of incorporation? The Declaration does this in several ways.

First, just as articles are filed with the state to begin its corporate life, the Declaration is a statement to the overseeing authority of governmental associations to begin its nationhood. Specifically, the overseeing authority is God, "the Supreme Judge of the World." The founders appealed not to mankind for recognition of nationhood but to "our Creator" who raises up nations and casts them down (Dan. 2:21).  In keeping with corporate formality, the Declaration lets it known to the world and to God himself that a new government is founded. The Declaration is a statement for formal recognition of the new nation's lawful existence.

Second, as business law includes an identification of the incorporator(s), so also does the Declaration. The Declaration begins by stating it is the declaration of "the thirteen united States of America." Business law grants to incorporators the authority to decide for themselves how the business will operate. Similarly, the Declaration states that the "business" of government derives its "just power from the consent of the governed." Thus, the thirteen states are the incorporators of our country.

Third, as business law allows for the articles of incorporation to describe the powers of the organization, so the Declaration formally states the powers of the thirteen independent, united states. For instance, a nonprofit organization must abide by strict rules of the Internal Revenue Service to receive tax exempt status. One rule includes how money will be spent. To receive tax exempt status, it thus becomes necessary to include language in the articles of incorporation that will empower the organization to take those actions that are in keeping with the requirements of tax exempt status. Even so, the Declaration of Independence empowers the thirteen states the "full Power to Levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do." Thus, the general authority of each state is contained within the Declaration.

Our Founding Fathers were legal scholars. They understood the significance of legal documents, and they made sure that they crafted a document that considered the laws of men and of "Nature's God." Their careful attention to legal formality, even to the finest details, is a reminder for us to do the same today.

A Nuance Regarding A Transfer on Death Deed

In the last post I generally discussed the attractiveness of a transfer on death deed. It is an efficient means by which to pass the house down to loved ones by avoiding probate. This post addresses an issue that arises when real property is held as joint tenants with right of survivorship.

Co-ownership in property can become a complex situation. Many individuals find themselves in a similar situation. One of these common situations occurs when co-owners of real property hold ownership as joint tenants with right of survivorship. This type of ownership involves a seemingly infinite number of implications. I will only address one today.

First, what happens when a joint tenant passes away? When a joint tenant passes away, the surviving joint tenant(s) retain(s) ownership of the entire property. For instance, if Alan and Bill own land as joint tenants with right of survivorship, and Alan dies, Bill would keep the land solely in his name. Nothing would pass through to Alan's heirs or devisees. Like the transfer on death deed, a result of holding property as joint tenants with right of survivorship is that the property passes outside of probate.

But, secondly, what happens if Bill, now having sole ownership of the land, wishes to execute a transfer on death deed so that the property avoids probate? He does not want to grant ownership in the house prior to his death, but he does not want his beneficiary to wait through the probate period to acquire an ownership interest in the land.

The second question is difficult because on the books of the recorder's office, the property may still be listed as owned together by Alan and Bill as joint tenants with right of survivorship.

An attorney should draft an affidavit of survivorship that lets the people at the courthouse know that Bill now is the sole owner of the property. This will allow Bill to execute the transfer on death deed, avoiding probate while retaining sole ownership in the property during his life.

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What is a Transfer on Death Deed?

The most valuable asset of many families is their house. Obviously, it is valuable from a monetary standpoint. But its role in families' lives is more than just the fair market value of the property. It is a place for families to bond, for parents to rest from a long day of work, and for children to play. Moreover, a family's house can secure financing for education, business opportunities, trips, etc. In a word, a family's house is the center of family life.

But what happens to the house when the parents pass away? You may have heard "through the grapevine" how complicated the probate process can get. You may wonder if there is any way to avoid the probate process.

One aspect of a  comprehensive estate plan is deciding how to transfer the house from the owner's hands to another's. This may be accomplished through a variety a means, so an informed Estate Planning attorney should guide you.

One way to transfer the house to the next generation is through a transfer on death (TOD) deed. Under Indiana law, a TOD deed allows a house to pass outside of probate, avoiding the complications of the probate period. In sum, the TOD deed may save lots of headaches if used properly in a total estate plan.