Real Estate

While the terms "estate tax" and "inheritance tax" are often used interchangeably, they are not synonymous. Let's try to clarify the difference.

Estate Tax

Estate tax is based on the net value of the deceased owner's property.  An estate tax is applied to these assets when they are transferred to the beneficiary. It is important to remember that an estate tax doesn't have anything to do with the beneficiary or that person's resources.

Federal estate tax only affects individuals who die with more than $5.45[s1]  million in assets and individuals with such large estates can leave that amount to their beneficiaries without being subjected to a  tax liability. Ninety-nine percent of the population will not owe federal estate tax upon their death.

In most circumstances, no federal estate tax is levied against spouses. As of the Supreme Court's recent ruling, this includes gay married couples as well as heterosexual couples. Federal estate taxes can, however, be charged if the spouse who is the beneficiary is not a citizen of the U.S. In such cases, though, a personal estate tax exemption can be used.  Even where remaining spouses have no liability for federal estate tax, they may be charged with state taxes in some states, taxes which cannot be avoided unless the couple relocates.

Inheritance Tax

Inheritance tax, as distinguished from estate tax, is imposed by state governments and the tax rate depends on the person receiving the property, and, in some locations, on how much that person receives. Inheritance tax can also vary depending upon the relationship between the testator and the benefactor. In Pennsylvania, for example, a spouse is not taxed at all; a lineal descendant (the child of the deceased) is taxed at 4.5 percent; a sibling is taxed at 12 percent, and anyone else must pay 15 percent.

Exemptions

There are exemptions that can reduce the amount of inheritance tax owed by significant amounts, but it is important that there be proper documentation of such exemptions for them to be applicable. Any part of the inheritance that is donated to charity does not require inheritance tax payment on the part of the beneficiary. Because of the inherent complexities of tax law and the variations from state to state, working with a tax attorney who has expertise with state tax laws s the best way to make sure you take advantage of any possible tax exemptions or avoidance.

A solid homeowners insurance policy can provide peace of mind about securing one of your most valuable assets. Unfortunately, many homeowners don’t fully grasp what exactly is covered under that policy, and most importantly, what isn’t. 

Homeowners insurance policies generally cover your home itself and other physical structures on the property. Your personal belongings also fall under most policies, along with property damage and bodily injury sustained by you or others on your property. You, your spouse and children, and any guests, tenants, or employees in your home can all be covered under this policy, just be sure to check when you purchase the policy.

Sounds like they’ve got you covered, right? Not so fast; there are a number of possible perils that are often not covered under basic homeowners insurance. Knowing what falls into this category can save you a lot of time and trauma if you ever experience one of these situations in the future.

The two main exceptions are earthquake and flood damage. The impacts of these natural disasters would not be covered by your standard policy. Earthquake insurance and coverage for some types of water damage can often be purchased as an addendum, but flood insurance must be purchased on its own as a separate policy.

Further, standard policies don’t cover damages to your building as a result of your failure to perform regular maintenance on your property. Insect, bird, or rodent damage, rust, mold, and any kind of wear and tear on your property is typically not covered. Neither are hidden defects, mechanical breakdowns, or food spoilage in the event of a power outage. Though there is no current concern for this, damage caused by war or nuclear exposure is also not covered.

Some things have minimal coverage built into your standard policy, for which you can purchase additional coverage as an addendum. Valuable property, including firearms, jewelry, silverware, etc., is usually covered by a standard $1,000. Insurance for replacement value of lost or damaged property is usually determined on an itemized basis that takes depreciation into account. You can expand this coverage by paying to remove depreciation from consideration.  Liability coverage can be increased if desired as well.

These should serve as general guidelines for your homeowners insurance, but be sure to consider the details on your specific policy.  It’s important to consider exactly what you have covered in order to determine what additional types of insurance you may want to purchase.

 

You are purchasing a home, and the escrow officer asks, “How do you want to hold title to the property?” In the context of your overall home purchase, this may seem like a small, inconsequential detail; however nothing could be further from the truth. A property can be owned by the same people, yet the manner in which title is held can drastically affect each owner’s rights during their lifetime and upon their death. Below is an overview of the common ways to hold title to real estate:

Tenancy in Common
Tenants in common are two or more owners, who may own equal or unequal percentages of the property as specified on the deed. Any co-owner may transfer his or her interest in the property to another individual. Upon a co-owner’s death, his or her interest in the property passes to the heirs or beneficiaries of that co-owner; the remaining co-owners retain their same percentage of ownership. Transferring property upon the death of a co-tenant requires a probate proceeding.

Tenancy in common is generally appropriate when the co-owners want to leave their share of the property to someone other than the other co-tenants, or want to own the property in unequal shares.

Joint Tenancy
Joint tenants are two or more owners who must own equal shares of the property. Upon a co-owner’s death, the decedent’s share of the property transfers to the surviving joint tenants, not his or her heirs or beneficiaries. Transferring property upon the death of a joint tenant does not require a probate proceeding, but will require certain forms to be filed and a new deed to be recorded.

Joint tenancy is generally favored when owners want the property to transfer automatically to the remaining co-owners upon death, and want to own the property in equal shares.

Living Trusts
The above methods of taking title apply to properties with multiple owners. However, even sole owners, for whom the above methods are inapplicable, face an important choice when purchasing property. Whether a sole owner, or multiple co-owners, everyone has the option of holding title through a living trust, which avoids probate upon the property owner’s death. Once your living trust is established, the property can be transferred to you, as trustee of the living trust. The trust document names the successor trustee, who will manage your affairs upon your death, and beneficiaries who will receive the property. With a living trust, the property can be transferred to your beneficiaries quickly and economically, by avoiding the probate courts altogether. Because you remain as trustee of your living trust during your lifetime, you retain sole control of your property.

How you hold title has lasting ramifications on you, your family and the co-owners of the property. Title transfers can affect property taxes, capital gains taxes and estate taxes. If the property is not titled in such a way that probate can be avoided, your heirs will be subject to a lengthy, costly, and very public probate court proceeding. By consulting an experienced real estate attorney, you can ensure your rights – and those of your loved ones – are fully protected.
 

Historically, tenant in common (TIC) projects were owned by a relatively small group of investors who knew each other, such as long-time friends, business partners or family members. Strategies to maximize tax savings and preserve equity typically guided investors to this type of structure, rather than creating a limited liability company or partnership to own the property.

In the late 1990s, real estate sales in the form of tax-deferred 1031 exchanges created a new industry. Promoters began soliciting and pooling funds from investors to purchase real estate. Participation in the pool helped investors find replacement property to guarantee their capital gains tax deferment continued.

In 2002, the IRS clarified when this type of pooling is considered a partnership interest as opposed to a TIC interest, a critical distinction for investors using funds from a 1031 exchange transaction. Following that, investments in TIC interests grew considerably due to the numerous advantages. For those who needed a place to invest their 1031 exchange funds quickly, TIC interests provide a relatively simple way to ensure the funds are spent within 180 days of the sale of the previous property, without the hassle of researching, investigating, negotiating and financing a property in less than six months. TIC investors do not have to burden themselves with the day-to-day management of their investment property. Finally, TIC investors can pool their resources to purchase fractional shares of investment-grade property which would otherwise be out of reach.

With all of its advantages, the TIC interest also carries its share of risks. For example, many TIC promoters charged fees that were excessive, or sold the property to the investors for more than it was worth. If property values decline or purchase loans mature, it may be difficult to refinance, forcing the property into foreclosure and taking the entire investment with it.

Other promoters failed to maintain reserve funds separate for each property. If a promoter filed for bankruptcy and did not properly use the reserve funds, TIC investors were left with no recourse and were forced to cover the reserves out of their own pockets or risk losing their investment.

Further risks are caused by the investors themselves and the nature of their relationship to one another – or lack thereof. Owners of TIC typically do not know each other. Decisions regarding TIC governance often require unanimous agreement by all owners, and just one objection can grind the action to a halt. When owners don’t know each other, or are spread across many states, it can be difficult to communicate and obtain a unanimous agreement.

Despite the risks, TIC interests can still be a good place to park your money – but you must be a cautious, diligent purchaser. Visit the property, seek information from sources other than the promoter, and carefully review the past and projected financial data.
 

Establishing a Life Estate is a relatively simple process in which you transfer your property to your children, while retaining your right to use and live in the property. Life Estates are used to avoid probate, maximize tax benefits and protect the real property from potential long-term care expenses you may incur in your later years. Transferring property into a Life Estate avoids some of the disadvantages of making an outright gift of property to your heirs. However, it is not right for everyone and comes with its own set of advantages and disadvantages.

Life Estates establish two different categories of property owners: the Life Tenant Owner and the Remainder Owner. The Life Tenant Owner maintains the absolute and exclusive right to use the property during his or her lifetime. This can be a sole owner or joint Life Tenants. Life Tenant(s) maintain responsibility for property taxes, insurance and maintenance. Life Tenant(s) are also entitled to rent out the property and to receive all income generated by the property.

Remainder Owner(s) automatically take legal ownership of the property immediately upon the death of the last Life Tenant. Remainder Owners have no right to use the property or collect income generated by the property, and are not responsible for taxes, insurance or maintenance, as long as the Life Tenant is still alive.

Advantages

• Life Estates are simple and inexpensive to establish; merely requiring that a new Deed be recorded.
• Life Estates avoid probate; the property automatically transfers to your heirs upon the death of the last surviving Life Tenant.
• Transferring title following your death is a simple, quick process.
• Life Tenant’s right to use and occupy property is protected; a Remainder Owner’s problems (financial or otherwise) do not affect the Life Tenant’s absolute right to the property during your lifetime.
• Favorable tax treatment upon the death of a Life Tenant; when property is titled this way, your heirs enjoy a stepped-up tax basis, as of the date of death, for capital gains purposes.
• Property owned via a Life Estate is typically protected from Medicaid claims once 60 months have elapsed after the date of transfer into the Life Estate. After that five-year period, the property is protected against Medicaid liens to pay for end-of-life care.

Disadvantages

• Medicaid; that 60-month waiting period referenced above also means that the Life Tenants are subject to a 60-month disqualification period for Medicaid purposes. This period begins on the date the property is transferred into the Life Estate.
• Potential income tax consequences if the property is sold while the Life Tenant is still alive; Life Tenants do not receive the full income tax exemption normally available when a personal residence is sold. Remainder Owners receive no such exemption, so any capital gains tax would likely be due from the Remainder Owner’s proportionate share of proceeds from the sale.
• In order to sell the property, all owners must agree and sign the Deed, including Life Tenants and Remainder Owners; Life Tenant’s lose the right of sole control over the property.
• Transfer into a Life Estate is irrevocable; however if all Life Tenants and Remainder Owners agree, a change can be made but may be subject to negative tax or Medicaid consequences.

The only real estate transaction most small businesses engage in is to enter into a lease for commercial space. Whether you are considering office, manufacturing or retail space, the following three tips will help you navigate the negotiation process so you can avoid costly mistakes.

 

“Base Rent” is Not the Only Rent You Will Pay

Most prospective tenants focus their negotiation efforts on the “base rent,” the fixed monthly amount you will pay under the lease agreement. You may have negotiated a terrific deal on the base rent, but the transaction may not be the best value once other charges are factored in. For example, many commercial lease agreements are “triple net,” meaning that the tenant must also pay for insurance, taxes and other operating expenses. When negotiating “triple net,” ensure you aren't being charged for expenses that do not benefit your space, and that you are paying an amount that is in proportion to the space you utilize in the building. Another provision to watch for is tenant's responsibility to also pay a pro rata share of increases in real estate taxes. 

 

There’s No Such Thing as a “Form Lease”

Most commercial property owners and managers offer prospective tenants a pre-printed lease containing your name and various terms. They present these documents often with a rider, and adamantly explain that it is the landlord’s “typical form lease.” This, however, does not mean you cannot negotiate. Review every provision in the agreement, bearing in mind that all terms are open for discussion and negotiation. Pay particular attention to the specific needs of your business that are not addressed in the “form lease.”

 

Note the Notice Requirements

Your lease agreement may contain many provisions that require you to send notices to the landlord under various circumstances. For example, if you wish to renew or terminate your lease at the end of the term, you will likely owe a notice to the landlord to that effect, and it may be due much earlier than you think – sometimes up to a year or more. Prepare a summary of the key notice requirements contained in your lease agreement, along with the due dates, and add key dates to your calendar to ensure you comply with all notice requirements and do not forfeit any rights under your lease agreement.

 

“Do it yourself” divorce is fraught with risks – even if your case is “simple” and both parties agree on all issues regarding division of property, support, and child custody and visitation. As many have learned the hard way, it is all too easy to make critical missteps today that will come back to haunt you down the road.

The proliferation of DIY websites and non-attorney legal document preparers give the impression that the process is simpler than it is. These services can help you deal with the court forms required to dissolve a marriage, including financial disclosures, motions, hearing notices and child support paperwork. It’s tempting to save money by using one of these services to prepare and file your divorce forms without using a lawyer.

Unfortunately, these services will leave you in the lurch when things do not go as planned, as they cannot offer you any legal advice or engage in any negotiations on your behalf. Worse still, they cannot point out the pitfalls contained in your paperwork which can pose risks to your financial future long after you think you’ve put the marriage behind you.

The typical do-it-yourselfer believes that everything is correctly resolved because the court accepted and processed the forms and has issued the divorce decree. However, this may or may not be the case; and any problems can remain undiscovered for years until, for example, one spouse embarks on a significant financial transaction such as purchasing a home.

A common scenario involves incomplete (or incorrect) provisions in a marital settlement agreement, leaving both spouses legally on the hook for a mortgage. What happens when the spouse who kept the home and obligated to make the monthly payments fails to do so? What happens when the other spouse applies for a mortgage on a new home, but the amount of the monthly payment of the previous mortgage is still considered when calculating the debt-to-income ratio? This is just one example of how “saving money” on the front end of your divorce can cost you greatly in the future.

Even if your divorce is “uncontested,” in that you and your spouse agree on all of the settlement terms, getting legal advice upfront will ensure the process goes smoothly and that you do not encounter any unpleasant surprises in the future. A consultation with a family law attorney can identify what issues must be addressed, point out potential negative consequences of certain decisions, and let you know what to expect throughout the divorce process.

If your divorce case is “contested,” meaning you cannot agree on terms regarding your property or children, it is important that you consult with a lawyer to obtain a realistic idea of what you can expect based on your legal rights under the circumstances. And, unlike the DIY services, an attorney can also represent your interests during settlement negotiations. If settlement negotiations are unsuccessful, your lawyer can ensure the court fully considers all information in your favor prior to making any rulings.

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

• Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
• Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
• Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
• Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
• Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
• Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
• Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
• Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.

Most people think of marriage as a declaration of love and commitment, not as a legal contract that defines the financial and familial obligations of each party. That is, until they start negotiating a divorce settlement and discover their state’s policy on the division of marital property and spousal support. Although not every couple establishes a prenuptial agreement, there are several good reasons for having a smart prenup in place before saying those magical words, “I do."

What is a Prenup?
A prenuptial agreement is a legal document that allows the couple to make decisions about their finances and marital property should they eventually decide to part ways. You cannot circumvent the child custody statutes in your state through a prenuptial agreement, although you can decide who gets to keep the family dog. The terms of the prenup must be legal and should be fair to both parties. For instance, an agreement that would leave one spouse homeless with no source of income would not be enforceable.

A prenup is particularly useful when one, or both parties, enter into the marriage with valuable assets or has children from a previous relationship. Older couples are more likely to consider a prenup because they have more assets to lose. Those who are exchanging matrimonial vows for a second or third time recognize that having a customized financial game plan in place can make divorce proceedings less stressful.

A prenup can eliminate later disputes over assets during a divorce and save the couple from acrimonious, time consuming and stressful litigation. 

When Should You Consider a Prenup?
A prenup might be a good idea if you have any of the following concerns:

• Providing peace of mind for the partner who has significantly more income or wealth
• Making sure your business remains intact, in your name
• Defining assets such as property, a retirement fund or investments as separate property, not marital property
• Retaining possession of family property, heirlooms or an anticipated inheritance after a divorce
• Looking after the long-term interests of children from a previous marriage
• Worrying that changing your career plan to raise children will leave you at a financial disadvantage
• Avoiding interference with an estate plan
• Financing long-term care for elderly parents or relatives

Starting Your Marriage the Right Way
The divorce laws in most states work on the assumption that both partners in a marriage have agreed to pool their tangible and intangible assets, and the courts generally attempt to make an equitable and fair division of these assets following a divorce.  A prenuptial agreement gives you and your intended spouse the opportunity to consider potential areas of disagreement regarding your financial future and address them in a forthright and realistic manner.

 

The recent economic recession, and staggering increases in health care costs have left millions of Americans facing incredible losses and mounting debt in their final years. Are you concerned that, rather than inheriting wealth from your parents, you will instead inherit bills? The good news is, you probably won’t have to pay them.

As you are dealing with the emotional loss, while also wrapping up your loved one’s affairs and closing the estate, the last thing you need to worry about is whether you will be on the hook for the debts your parents leave behind. Generally, heirs are not responsible for their parents’ outstanding bills. Creditors can go after the assets within the estate in an effort to satisfy the debt, but they cannot come after you personally. Nevertheless, assets within the estate may have to be sold to cover the decedent’s debts, or to provide for the living expenses of a surviving spouse or other dependents.

Heirs are not responsible for a decedent’s unsecured debts, such as credit cards, medical bills or personal loans, and many of these go unpaid or are settled for pennies on the dollar. However, there are some circumstances in which you may share liability for an unsecured debt, and therefore are fully responsible for future payments. For example, if you were a co-signer on a loan with the decedent, or if you were a joint account holder, you will bear ultimate financial responsibility for the debt.

Unsecured debts which were solely held by the deceased parent do not require you to reach into your own pocket to satisfy the outstanding obligation. Regardless, many aggressive collection agencies continue to pursue collection even after death, often implying that you are ultimately responsible to repay your loved one’s debts, or that you are morally obligated to do so. Both of these assertions are entirely untrue.

Secured debts, on the other hand, must be repaid or the lender can repossess the underlying asset. Common secured debts include home mortgages and vehicle loans. If your parents had any equity in their house or car, you should consider doing whatever is necessary to keep the payments current, so the equity is preserved until the property can be sold or transferred. But this must be weighed within the context of the overall estate.

Executors and estate administrators have a duty to locate and inventory all of the decedent’s assets and debts, and must notify creditors and financial institutions of the death. Avoid making the mistake of automatically paying off all of your loved one’s bills right away. If you rush to pay off debts, without a clear picture of your parents’ overall financial situation, you run the risk of coming up short on cash, within the estate, to cover higher priority bills, such as medical expenses, funeral costs or legal fees required to settle the estate.

When it comes time for your business to move into a new commercial space, make sure you consider the terms of your lease agreement from both business and legal perspectives.  While there are some common terms and clauses in many commercial leases, many landlords and property managers incorporate complicated and sometimes unusual terms and conditions.   As you review your commercial lease, pay special attention to the following issues which can greatly affect your legal rights and obligations.

The Lease Commencement Date
Commercial leases typically will provide a rent commencement date, which may be the same as the lease commencement date. Or not. If the landlord is performing improvements to ready the space for your arrival, a specific date for the commencement of rent payments could become a problem if that date arrives and you do not yet have possession of the premises because the landlord’s contractors are still working in your space. Nobody wants to be on the hook for rent payments for a space that cannot yet be occupied. A better approach is to avoid including in the lease a specific date for commencement, and instead state that the commencement date will be the date the landlord actually delivers possession of the premises to you. Alternatively, you can negotiate a provision that triggers penalties for the landlord or additional benefits for you, should the property not be available to you on the rent commencement date.

Lease Renewals
Your initial lease term will likely be a period of three to five years, or perhaps longer. Locking in long terms benefits the landlord, but can be off-putting for a tenant. Instead, you may be able to negotiate a shorter initial term, with the option to extend at a later date.  This will afford you the right, but not the obligation to continue with the lease for an additional period of years.   Be sure that any notice required to terminate the lease or exercise your option to extend at the end of the initial lease term is clear and not subject to an unfavorable interpretation.

Subletting and Assignment
If you are locked into a long-term lease, you will likely want to preserve some flexibility in the event you outgrow the space or need to vacate the premises for other reasons. An assignment transfers all rights and responsibilities to the new tenant, whereas a sublease leaves you, the original tenant, ultimately responsible for the payments due under the original lease agreement. Tenants generally want to negotiate the right to assign the lease to another business, while landlords typically prefer a provision allowing for a sublease agreement.

Subordination and Non-disturbance Rights
What if the landlord fails to comply with the terms of the lease? If a lender forecloses on your landlord, your commercial lease agreement could be at risk because the landlord’s mortgage agreement can supersede your lease. If the property you are negotiating to rent is subject to claims that will be superior to your lease agreement, consider negotiating a “nondisturbance agreement” stating that if a superior rights holder forecloses the property, your lease agreement will be recognized and honored as long as you fulfill your obligations according to the lease.