Entries tagged with “estate”.

Well it finally happend — something that I never thought I would see.  No, my kids didn’t clean up their rooms without being asked – something even more remarkable. Congress has allowed our federal estate tax to expire. There have been an abundance of articles written on this issue in the last few weeks and I have been delaying this newsletter in hopes that I would be able to bring you some “hot off the press” discussion of new tax legislation. Congress is simply not cooperating with me.

So what is all the big talk on this estate tax repeal? Under the current law, anyone dying in 2010 is not subject to estate tax, no matter how large their estate. However, it is widely believed that Congress will enact legislation which will reintroduce the tax retroactive to January 1 of this year with an exemption yet to be determined but likely equal to the amount which was available in 2009 ($3,500,000). If Congress doesn’t act, then in 2011 the estate tax will return with a vengeance; the law will revert to what existed in 2001 with top rate of 55% and, more importantly, a reduction in the exemption to $1,000,000.What does this mean for you or your friends or clients? Today is a good day to die. However, I am not suggesting that as a prudent estate plan. My advice is that you all continue to pay attention to the headlines to see what action Congress may take. For most of you there should be no immediate need to modify your estate planning documents, but it is important to understand how the ground rules may change in this area of tax law. When we have some definitive action from Congress, I am sure I will have something more to say.

Any of you paying attention to this estate tax repeal saga will note that I haven’t mentioned “carryover basis” rules. When Congress gave us this 2010 estate tax repeal, it included a little surprise income tax increase by changing the way capital gains taxes are determined for heirs of a decedent’s estate. Imagine that. I will spare you all of the ugly details, but if you want to know more, a quick internet search will give you plenty of bedtime reading.

While I am on the subject of taxes, I do want to mention one other income tax change that might be of interest. As of January 1 all of you can convert your traditional IRA’s into a Roth IRA. Previously this conversion option was subject to annual income limitations, but those limitations have been eliminated. With a Roth IRA your assets grow tax-free and your distributions during retirement will be tax-free. A traditional IRA gets you the same tax-free growth but distributions are subject to tax. The trade off here is that the conversion to the Roth will generate an immediate income tax liability based on the value of the assets converted. So the choice is to pay tax now or pay later. If you believe that your tax rates will be higher in retirement then that weighs in favor of converting now. However there are many variables that impact this decision, including future changes in tax laws and whether you have other sources of liquidity to pay the current tax liability, so I encourage you to talk to your tax advisors about this planning option. Also keep in mind that Congress really wants you to convert in 2010 and the law includes special rules that will allow you to defer payment of your income tax over two years. This makes the conversion option a lot more attractive. Remember the show Let’s Make a Deal…I hope we all pick the correct door!


Do you have real estate owned in your corporation?  Watch out for a tax surprise!

Many of you have heard from your advisors (including yours truly) that if you own real estate either for your business or for investment then you need to protect yourself from liability by having the property titled in some form of corporate entity; see my June newsletter.  However, it is very important that you choose the right type of entity to own your real estate.  As a general rule, you should not use a corporation.  Why?  Corporate tax law is not friendly to the real estate owner.

I will spare you a lengthy discourse on the ins and outs of corporate tax laws, although I assure you that it’s fascinating!  The short answer is that real estate owned inside of a corporation generates an unexpected tax liability if you ever wish to move that property out of the corporation.  Let’s say that you acquire a couple of rental properties with a friend and you set up a corporation as the owner, but some years later you and your friend decide to part ways and split up the properties.  This would typically involve dissolving the corporation and transferring property out to each owner.  The problem is that the tax law treats that transfer of property as a “deemed sale.”  If the property has appreciated then that deemed sale triggers a capital gains tax for the corporation.  It is irrelevant that you haven’t actually sold the property or that no cash has changed hands.

For this reason, you should avoid using a corporation to own real estate in most cases.  Keep in mind that I am talking about real estate that you buy and hold (e.g. a location for your operating business, rental or investment property).  If, on the other hand, you are in the business of buying and selling real estate on a short term basis, then a corporation may work perfectly well for your needs, since you will recognize a tax liability anyway when you sell property; there is not the same potential for a deemed sale surprise.

Enter stage left….the limited liability company (LLC).  An LLC is typically taxed as a partnership, which operates under entirely different tax rules.  In particular, real estate can almost always be moved in and out of the name of an LLC without generating a tax liability.  Since the LLC still provides the same basic limited liability protection available in a corporation, the LLC has become the entity of choice for owning real estate.

What about an “S” corporation?  An “S” corporation is, in many ways, taxed like a partnership, however one important difference is that the deemed sale rule described above will still apply for an S corporation.  Although there may be special circumstances that help decrease this tax liability with an S corporation, the better option is to stay away from a corporation altogether.

If you are unfortunate enough to have a corporation that owns real estate already, then you may be stuck with this potential tax issue until you are ready to sell the property.  But please talk to your tax advisors before you take any action; you may have planning options to help minimize the tax liability.

Remember, tax time is no time for surprises.


Land and inherited by a group of misfits?  POA to the rescue!

Probably one of the worst things that can happen in a decedent’s estate is for a group of beneficiaries who don’t get along to inherit real estate.  Under North Carolina law, beneficiaries  under a Will are generally vested with title to the property as of the date of the decedent’s death, which means the beneficiaries, and not the executor, have the authority concerning sale of the property.   Although Wills often include a provision addressing the executor’s authority to sell real estate, the exact language of the Will is usually insufficient to allow the executor to handle the sale of real estate without involvement of the beneficiaries.  That is, if the real estate is not left to the executor with directions to sell the property as part of the estate administration, then the beneficiaries will inherit the property as tenants-in-common as of date of death.

This means that if the beneficiaries desire to sell the property they must all agree on the terms of the sale and they must all be involved in the execution of the documents.  Imagine the prospect of involving numerous owners in a sale negotiation and then getting them to agree.  Have you ever tried to pick a place to go out to eat based on input from a group of people?  Any interested buyer is going to lose patience pretty quickly unless the decision-making can be delegated.

A power of attorney (POA) is the solution.  The beneficiaries can appoint one individual (known as the attorney-in-fact) with full authority to negotiate the sale of the property and execute all documents including the deed.  This delegation eliminates any required involvement of the beneficiaries — the actual owners of the property.  The attorney-in-fact may be the Executor of the decedent’s estate or one of the beneficiaries or some other party; the key is to find someone who can make a good decision about a sale of the property and who is trusted by all the beneficiaries.

It is important to make sure that all of the beneficiaries as well as the beneficiaries’ spouses sign the POA; this is required under NC law to convey good title to the property.  Also the POA will need to be duly recorded in the county where the real estate is located.  The POA document should ensure that the attorney-in-fact is authorized not only to execute sale documents but also to receive proceeds of the sale on behalf of the beneficiaries.  This will ensure  that the attorney-in-fact can direct the closing attorney to dispose of the proceeds in the most efficient manner.

So what happens if the beneficiaries can’t agree on what to do and are unwilling to appoint an attorney-in-fact?  A mess…a big mess happens.  As tenants-in-common, each beneficiary will effectively have a veto right over any decision concerning the property.  More importantly, any one beneficiary can initiate legal proceedings to force a sale or a severance of the property, in which case the value of the property will likely be reduced for all concerned.  In this case, the POA may still be an option if cooler heads can prevail.


Are you setting your family up for a big battle after your death? Unfortunately one of the things that I see all too often is the disintegration of family relationships at the death of a loved one.  A parent or grandparent may be the glue that binds a family together, and once they have passed away, a lot of the historical conflict in the family rises to the surface.

You would think that the primary fights between a decedent’s heirs would involve money.  Actually, the main disputes have little to do with the estate but are simply a rekindling of prior transgressions – old wounds opened up.  I have seen major disputes involving distribution of tangible personal property (i.e. family furniture, heirlooms, etc.), most of which has little financial value.  Obviously these items carry a lot of emotional value and individuals have a tendency to dig in and refuse to compromise if they believe they are being asked to give up something with these strong emotional ties.  Other disputes often involve a perceived lack of fairness in the way a decedent may have assisted one beneficiary during life with gifts to the exclusion of other beneficiaries.

Often these conflicts in an estate can lead to litigation.  The litigation may involve a challenge to the validity of the Will, known as a “caveat.”  A caveat may be initiated under several theories but the basic argument is that the Will is not the validly executed Last Will and Testament of the decedent.  More often, estate litigation may involve a challenge to the way the Executor is administering the estate, particularly where the Executor is also one of the beneficiaries.  In any case, once the beneficiaries hire lawyers the battle lines are drawn.  Regardless of the outcome, everyone loses in the process because the individuals and the estate incur unnecessary legal expenses in order to resolve their differences.

So what can you do to avoid these problems if you are aware of inherent conflict in your family or you have a friend in this situation?  The best advice I can give is to encourage communication.  Talk to your family and beneficiaries.  Tell them your wishes and your intent.  You don’t need to give them all the details of your Will or estate plan, but try to give them some general idea of what to expect.  I realize this may be an uncomfortable or  unpleasant discussion in many cases, but it can make a real difference.  This is most important where you are giving special treatment to one or more beneficiaries or where you expect some beneficiaries will not understand your motivations.  Even if the beneficiaries don’t like the results at least they can’t later say (after your death) that your wishes are not being honored.  Beneficiaries are a lot less likely to wage a battle based on their own selfish desires if they understand that the intent and wishes of the decedent are being carried out.

However you also have to be careful how you communicate on these issues.  Your validly executed Will (or Trust) is the final word on your intent and your distributions and it will control over any oral statements you may make about your wishes.  Whatever you do, please don’t tell your beneficiaries what they want to hear and then provide for something different in your Will.  I have had a few of these situations over the years and they almost always lead to unnecessary legal expenses and sometimes messy litigation.

Many of my clients ask about including a “no contest” clause in their estate documents.  While a “no contest” clause can discourage a Will caveat or other litigation under the right facts and circumstances, it is not a silver bullet.  Many of the disputes described above can and will arise regardless of any such clause in the documents.  By all means if you expect a problem in your estate, please make your estate planning attorney aware so he can put a big red letter sticky note in the file “Trouble Ahead!”

Remember communication can go a long way towards heading off these disputes.  More importantly communication can help heal the wounds that feed these issues and that should be the main goal for you and your family.