TAXING MATTERS
Volume 2, Issue 1 :: Spring 2007
How Should Real Estate be Titled?
A number of options exist for holding title to real estate, and the manner in which title is held may override what you provide in your will and other estate planning documents. This article explores some of the common methods of ownership and identifies the pros and cons of each.
Common types of property ownership include:
- Individual ownership
- Joint Tenancy with Rights of Survivorship
- Tenants by the Entirety
- Tenancy in Common
- Community Property
- Trusts
- LLCs and FLP
Individual Ownership.
With individual ownership, you hold title in your own name. Your will directs where the property goes upon your death. A durable power of attorney is necessary as well in order to address who controls the property in the event you were to become incapacitated. Otherwise, a court-appointed guardian makes the decisions. Finally, property titled in your name can be reached by your creditors and is, therefore, exposed to the risk of lawsuit.
Joint Tenancy with Rights of Survivorship.
Many married couples hold all of their assets as joint tenants with rights of survivorship (JTWROS). Sometimes, a widowed parent will put property into JTWROS with a child.
It is important to remember that JTWROS means that upon death, the property will automatically go to the surviving owner. Your will cannot direct otherwise—JTWROS trumps a will! This could lead to accidental disinheritance of other family members. Moreover, the property is then exposed to the co-owner’s creditors. You then have to worry what would happen if your co-owner were sued. In addition, when you lose control of the property, it can no longer be mortgaged or sold without the co-owner agreement. Finally, there are also gift tax and income tax implications in owning JTWROS property if the co-owner is not your spouse.
Tenants by the Entirety.
Tenants by the entirety is a special form of ownership for a married couple. It is not recognized in Georgia, but it is recognized in some other states, including Florida.
It is similar to JTWROS and has many of the same pros and cons. Upon death of one spouse, the other automatically gets the property. However, this form of ownership offers greater asset protection, since the creditors of one spouse cannot reach the property. But if a co-owner dies, asset protection is lost.
Tenancy-in-Common.
In a tenancy-in-common, each owner’s share goes according to his/her will at death. During lifetime, you can sell your share to whomever you please.
Community Property.
Community Property is a specialized form of ownership recognized only in Louisiana, Texas, California, Idaho, Nevada, Arizona, New Mexico, Washington and Wisconsin. Upon a person’s death, his/her share goes automatically to his/her spouse.
Trusts.
In a trust, the named trustee controls the property for the benefit of one or more beneficiaries. This helps avoid court-appointed guardianship for an incapacitated beneficiary.
LLCs and FLPs.
LLCs (Limited Liability Companies) and FLPs (Family Limited Partnerships) offer asset protection in addition to avoiding guardianship because a Manager or General Partner is in control. One by-product tends to be estate tax savings. This makes the LLC/FLP the entity of choice for real estate.
Do I Need to Plan for Long Term Care?
Long term care will be needed if you are ever unable to perform normal daily activities (like eating or dressing) without assistance from others. Often this type of care becomes necessary because of a severe injury or illness. The care can be provided either as home health care, assisted living, or nursing care.
The cost of long term care can easily total $5,000 to $8,000 per month. This can rapidly deplete one’s finances, as the average nursing home residency is three years. Those with Alzheimer’s might require an even longer duration of care.
How can the cost of care be financed? Many people think that the government will take care of things. However, Medicare covers only those age 65 or older and funds only “skilled care” for periods of up to 100 days. Medicaid is intended to provide medi-cal services to the poor, and has become increasingly difficult to qualify for by trans-ferring assets to loved ones.
Health insurance will pay nursing home costs only for a brief recuperative pe-riod after an injury or ill-ness. Disability insurance will not pay for long term care, although it does re-place lost income if you are unable to work after a certain period of time.
This means that your long term care must be funded by either you or your family. That can cause cash flow problems and serious asset depletion if the cost of long term care must be paid over a long period of time.
In order to afford the cost of long term care in the fu-ture, it is necessary to plan for long term care now. One way to approach it is to consider the purchase of long term care insurance. A business owner can deduct the cost of the insurance typically without having to pay tax on the benefits re-ceived under the policy.
In that regard, a LTC policy provides an enormous advantage over traditional disability insurance.
Another alternative is to use permanent life insurance to manage the risks of either death or need for long term care. Tax free borrowing from the policy could fund the costs while still providing a death benefit that ultimately replenishes the moneys expended for long term care.
Exit Strategies for Business Owners
To paraphrase a comment made by a valued client: “You have to make sure your business survives when the time comes for you to take the eternal dirt nap.” It is important to have a plan if you are no longer there to run things.
Only 30% of family-owned businesses make it to the next generation; 12% to the third generation; and less than 5% beyond that.
The reason? Most business owners do not plan for suc-cession. As stated by an-other valued client of ours, “It’s always important for me to have an exit strategy from the outset.”
Who would make sure the business keeps running? Maybe family members, business co-owners, and/or employees. You could also consider an interim Board of Directors to oversee the business during a time of transition, which might include not only death, but also incapacity. There are many ways to transition a business, and it’s important to seek professional advice due to tax implications.
Spotlight on Illegal Immigration
In 2004, the federal government instituted a Basic Pilot Program for the verification of employment eligibility of newly hired employees. The program has been purely voluntary as to employers.
Georgia took things a step further and made the voluntary program mandatory if you want to do business with the State or any political subdivision.
This law goes into effect July 1, 2007 for businesses with 500 or more employees; July 1, 2008 if more employees; and July 1, 2009 for all other employers. It is unclear at this juncture whether subcontractors are included in this number count. Hopefully, pending regulations will answer that question.
What this means is that you will need to register and verify new employees’ work status through the Department of Homeland Security Work Authorization Program. At present, only one such program exists: SAVE, which has an error rate of 20% to 40%. Hopefully, that rate will decline over time.
In addition to this legislation, wages paid to illegal immigrants are not deductible for Georgia income tax purposes. For this purpose, a legal worker is one who has a properly completed and documented I-9 form, or one who has a valid Georgia driver’s license or ID card issued by the Georgia Department of Driver Services. This law goes into effect on January 1, 2008, and applies to new employees hired after 1/1/08. It applies both to sub-contractors who get 1099 forms and employees who get W-2 forms.
Immigration Enforcement: The Ice-Man Cometh
Immigration Customs En-forcement (ICE) investigators have undertaken new policies in the crackdown on illegal immigration, such as criminal indictments, hefty civil fines, job-site and work-place raids, arrests of unauthorized workers (including sub-contractors), and asset forfeitures.
Under the law, an employer cannot hire or keep employing someone has either actual or “constructive” knowledge that the worker is illegal. ICE is taking on employers who ignore evidence establishing that an employee is an illegal alien. So, if the employer takes no action, the ICE-man comes cracking down.
ICE Assistant Secretary Myers is quoted as saying: “We can achieve far greater respect for the law among employers by bringing criminal prosecutions and seizing assets derived from illegal employment schemes. The prospect of ten years in federal prison and losing that new home and car to forfeiture has much sharper teeth than a small fine. This is the future of work-site enforcement.” What should the business owner do? Comply with the law, follow through on I-9’s and terminate known illegals.
Inside Corner: Focus on L&G Staff
Congratulations to Sydnee Gilbert & Stephen Roberts who married on December 16, 2006.
Shelley Parks, an L&G administrative staffer, served as Maid of Honor.
L&G recently became a member of both the Greater Atlanta Home Builders Assn. and the National Assn. of Home Builders.
Justin Martin interned with L&G and will be graduating with a degree in accounting from Appalachian State in 2007. Upon completion of his degree, Justin will be joining L&G’s full-time professional staff.
Joe Skalski recently finished a course of study as a Certified Wealth Preservation Planner and Certified Asset Protection Planner. Melissa Stevens has been helping with the recruitment of both L&G staff as well as accounting staff needed by clients.
Plans are already underway for the Fall Surety Seminar.
Finally, a post-busy-season party and bowl-a-thon was held on the first Friday after April 15.
Frequently Asked Questions
Q1: I own a piece of land which I bought for $20,000. As the land appreciated, I’ve refinanced it a few times. It’s now worth $400,000 with a mortgage of $300,000. Does that mean that upon sale, I would pay tax on $100,000 of gain?
A1: Actually, your taxable gain is not based on the money you receive at closing. Instead, it’s the difference be-tween your sales price and your cost. Some of your clos-ing costs might be deductible, but if you bought land for $20,000 and sold it for $400,000, your taxable gain is $380,000. You could try to minimize this gain by doing a 1031 exchange.
Q2: I own a condomin-ium that I bought for $100,000. I’ve taken about $40,000 of depre-ciation deductions. What’s my gain if I sell it for $150,000?
A2: The depreciation de-ductions are subtracted from your cost-basis, so you’re adjusted basis is $60,000, and if you sell the condo for $150,000, your gain is $90,000.
Q3: I sold a property and gave the sales pro-ceeds to my daughter. That means she pays tax on the capital gain instead of me, right?
A3: No. The tax laws do not allow you to transfer income to another per-son. You must pay tax on the gain, and you might have to pay gift tax on the gift of the proceeds to your daughter. I wish you had notified us before you completed this transac-tion. We could have structured it differently. Perhaps you could have given your daughter a fraction of the property first and then sold it. That could result in some of the gain being shifted over to her, and it would reduce any potential gift taxes.
