This is a continuation of last week's blog. Son Arthur prevailed in the Court of Appeals, with his argument that the real estate his mom had bought before her marriage to Robert was separate property. Thus in her estate it would be divided equally between Arthur and Robert. Robert then took the case further, to the Washington Supreme Court. How did it rule?
Robert relied on an earlier reported case finding joint title to be indicative of community property. This caused the Supreme Court to examine its presumptions. It is pretty well settled in the law that property acquired before the marriage is separate property and remains so until clearly made community. The earlier case Robert was relying upon, confused that presumption.
Continue reading "Community property: does changing title change ownership? (2 of 2) " »
Property brought into a marriage is separate property. It sometimes happens that a married person wants to borrow against his or her separate real estate, and the title is put in both spouses' names in the refinancing. This might be done so the bank can more easily pursue its remedies if the loan isn't paid. Does the change in title make the separate real estate into community property?
The Borghi case decided by the Washington Supreme Court in 2009 isn't exactly like that, but it goes a long way toward answering the question. Jeannette had bought property on a contract in 1966. In 1975, two things happened. First, she got married to Robert. Second, she got clear title to the property, meaning it had been paid off. For some reason, the development company that had sold her the property issued the clear-title deed in the names of both spouses. It wasn't recorded until 1979, when they borrowed against the property.
Continue reading "Community property: does changing title change ownership? " »
Why, despite the misgivings listed in last week's blog, does Lars invest 20% of the trust in the Vanguard index REIT? First, he likes real estate, feels it's somehow a special investment. It's kind of the old "they aren't making any more of it" thing. They don't call it real (estate) for no reason.
OK, so that's pretty subjective: what else? The REIT he's chosen is both diversifying and diversified. That is, in a portfolio of mostly stocks and bonds, real estate acts a little differently. This is good. When stocks are down, REITs might not be. And the Vanguard fund is itself spread into all kinds of real estate, so he's not betting everything on just shopping centers, or apartments.
Continue reading "Buy REITs to diversify into real estate? (Part 2 of 2)" »
Lars as trustee has invested in an indexed REIT fund offered by Vanguard. Lars likes real estate. He has watched Uncle Nils get rich in real estate. He has seen a number of other clients do the same. He doesn't fool himself that it's easy, but it does seem to be the most common way in his medium-sized city to build a big net worth.
So in the $500,000 family trust he has 20% in the REIT fund. It's easier than buying and managing apartments, or a building with commercial tenants. Because it's less painful Lars wonders whether it's less effective.
Continue reading "Buy REITs to diversify into real estate?" »
At this month's dinner at their favorite restaurant Guy, Lars is going over the September 30 results in his investment bet with rich Uncle Nils. When they started this at the beginning of 2012 Nils was excited about gold's then-recent performance so his money is on a mix of metals. With family trust money Lars is diversified as he should be, with equal portions of US stocks, international stocks, bonds, a REIT fund, and Nils's concoction.
It has been a very bad year for Nils's precious commodities. He's down 23% for the year, although he's recovered by about 6% this quarter. Lars is up 4% for the quarter and 3% for the year, with stocks (US stocks up 21%!) carrying the freight. The leader gets to choose the drink at each quarterly review. Nils has done a little better for the three months, but he's feeling down over his losses and also a little off physically, having tests recently. So from lack of energy he defers to Lars who orders a couple Hunters: whiskey and cherry brandy. Neither one of them is a hunter but it seems fallish and manly.
Continue reading "The investment bet: third quarter, second year. " »
Of course the owner of my property (me by definition, right?) is the insured on our property and casualty policy. Duh!
Well come to think of it, maybe not. At the advice of my lawyer and accountant, I put the apartment holding into an LLC, for liability protection. Am I still the insured? And if so, what if the place burned down, with the LLC as the owner but not the insured. Could the insurance company repudiate coverage? Yikes!
Note to self: contact my agent Monday and get the LLC at least added as an insured. (Editor's note: the insurance company's initial reaction is sometimes to charge a higher commercial rate for an LLC owner. We have found this can usually be avoided.)
Continue reading "Is the owner of your property the insured?" »
CPA Lars got rich uncle Nils's real estate into family partnerships in the early days of that device's popularity. Being in the financial business with a lot of wealthy clients, Lars got exposed to the advantages. Even the early limited partnerships offered asset protection, at least for those limited partners who weren't also the general partner. When limited liability companies were authorized they offered even the general partner (now to be called the manager) a shield. Lars has helped Nils to convert his LPs to LLCs with little cost or tax effect.
LLCs also offer a good way of making gifts to save estate taxes. The founder is usually a manager, and can keep control of the investment despite having given away shares of ownership. Part of the appeal is in the valuation of the gifts. A 5% interest in an LLC with a $2 million building would seem to be worth $100,000. But you couldn't sell it for that, because a new 5% owner would have little control over the fate of his investment, and a scant market for unloading it. So an appraiser might say it's a $70,000 gift, thus saving $30,000 of the donor's gift tax exemption. Some call this a "discount," but it's just the reality of the value of the interest given.
Continue reading "Should you give some of your LLC away? " »
Executive summary: Yes.
Lars's Uncle Nils is a very rich guy who owns several investment properties. Technically he doesn't own the properties; he owns limited liability companies (LLCs) that own the properties. Why?
Think inside and outside liabilities. Let's say there was an explosion in one of Nils's apartment buildings, that was found to be caused by negligence (say the failure to attend to a heating system he had reason to believe was shaky). Let's say there were death claims coming out of the incident, that exceeded the amount of Nils's insurance. If he owned the apartments outright, all his assets would be exposed. If instead they were in an LLC that was operated properly, the loss would likely be limited to that single investment. This is protection from inside liabilities.
Continue reading "Should your investment real estate be in an LLC?" »
Lars is inclined to use a limited liability company (LLC) to try to keep their beach place in the family for a time beyond his and Kyra's generation. Lawyer friend Duncan would help them form the LLC. Then they would transfer title to the beach into the name of the LLC. Lars and Kyra would initially be the only owners (Members), but over time they would give LLC interests to their children. The Operating Agreement (the LLC equivalent of a partnership agreement) could have a keep-it-in-the-family provision that would give the LLC and its Members the right to buy back any ownership interest that fell into the hands of a creditor or divorcing spouse of a family member.
Lars and Kyra would also be the initial Managers of the LLC, but it would be good training for them to work in one of the kids as a Manager before long. The Managers are responsible for all operations like paying bills, maintaining the property, and scheduling the use of it. It will greatly lessen the likelihood of friction over the beach if Lars and Kyra put money into the LLC along with the real estate, and maybe provide for more funds to be added via their Wills or Living Trust.
Continue reading "Should your second home be in a trust or an LLC? " »
Lars has already decided (just two blogs ago) not to put his main home in a residence trust. The main reason is his children would lose the step-up in basis they would otherwise get by inheriting the house from him and Kyra, if they received it by gift instead, via the trust. An inheritance gets a step-up; a gift does not. None of the kids seems a likely candidate for living in the house after Lars and Kyra are gone, so it would be sold. This would incur capital gains tax that would largely offset the estate tax savings of a residence trust.
It's a little different with the beach place. Lars thinks the family would like to keep it long-term. At least he hopes so; he likes to think of little feet wading in the salt water there, many years from now. Back to tax thinking here: if the place isn't sold, the loss of step-up isn't a problem, so maybe a residence trust is a better idea for the beach? They're not just for primary residences; it's legal to do one with a second home.
Continue reading "Should your second home be in a residence trust?" »
Lars and Kyra are semi-wealthy, having a net worth between $5 million and $10 million. This exceeds their combined State estate tax exemption of $4 million. Washington has one of the highest estate tax rates in the nation, starting at 10% and progressing to 20%. Most other states don't even have an estate tax. Should Lars and Kyra consider changing their primary residence?
They aren't the best candidates, mainly because CPA Lars is still working. The months some people are down south avoiding the rain, he's up here reviewing tax returns. He doesn't mind this. He thinks he'd have trouble getting into the mentality of spending half the year away, rain or no. Remarkably, Lars has never been to Palm Springs or Palm Desert, where many of his clients go. His other place is on Puget Sound, where he and Kyra go many weekends and a week or two in the summer. But for some of Lars's clients, a change in residence is more realistic.
Continue reading "What should be your primary residence? " »
Lars is paying his homeowners' insurance bill for the year. The company allows installment payments but Lars always just does it all up front. He does the same with property taxes in April, even though he could put off half 'til October without even any interest charge. He knows this makes him an old soul.
Ever the diligent professional, Lars tries to get a little thought going on the seeming non-subject of homeowners' insurance, hoping he might come up with a helpful occasional tip for clients. Plus a little diligence could make a big difference for Lars's family in a future problem situation; it's part of his role to look out for such things. The topic feels boring, but there are probably as many insurance people as there are CPAs and maybe they think their work is as interesting and useful as Lars's.
Lars tries to come up with a short list of questions. First, OK, how about amount of coverage? What's my house worth (remembering the building could burn down but the land couldn't)? And what if I guess wrong? Isn't there some sort of guaranteed replacement coverage, and if so do I have it?
Continue reading "Are you doing homeowners' insurance right? " »
Lars the CPA has talked with a lot of clients about personal residence trusts. They're one of the better ways to get assets out of one's estate. You put your home in a trust that lasts for say ten years. During the term you still essentially own it. At the end of the ten years the house belongs to a second-stage trust for your kids, out of your taxable estate, and you rent the place from them.
You do have to report a gift at the beginning, using some of your Federal gift and estate tax exemption. But it's in a discounted amount, due to the ten-year deferral of the gift. The gift of a $600,000 house might be reported as a $400,000 gift, saving $200,000 of exemption. And while the renting-from-the-kids part might seem a little daunting financially, it's usually not that bad. Market rent on a nice home isn't usually much more than paying the expenses, which you'd be doing anyway. So there isn't much effect on one's cash flow or liquidity.
Continue reading "Should you put your home in a residence trust? " »
Lars has been cataloging (see last week) bad income tax effects of a bypass trust established from the estate of the first spouse to die, for the lifetime benefit of the surviving spouse. The main reason lawyers and clients put this arrangement into Wills and Living Trusts, is to preserve the estate tax exemption of the first estate. There's even now an estate tax reason why this seems less useful, in addition to the income tax factors Lars has listed: we now have "portability" of the Federal estate tax exemption, allowing the surviving spouse to go forward owning the exemption of the deceased spouse to the extent it isn't saved in a bypass trust.
So with all these negatives, why have a bypass trust arrangement? Let's deal with the last-noted first. Yes we have portability of the Federal exemption but reliance on it has three weaknesses. First, it can be lost by remarriage. Second, even if it is retained it protects only the flat amount of the exemption, where a bypass trust shields from future estate tax not only its initial funding but also any appreciation in its value during the surviving spouse's lifetime. So if it's funded with $5 million of stocks and real estate that double in value, then $10 million avoids estate tax when the surviving spouse dies. Third, the State estate tax (at least in Washington) has no portability feature, so the first exemption is lost if there is no bypass trust.
Continue reading "With all these income tax problems, why have a bypass trust? " »