In 2001, President Bush and a Republican-controlled Congress enacted a law that greatly reduced and will eventually eliminated the federal estate tax. The catch is, the law sunsets after ten years, meaning that in 2011, the laws governing the federal estate tax will be as those laws existed in 2001. Since passing the 2001 law, the Republicans attempted on many occasions to pass a bill that would permit the permanent repeal of the estate tax. President Bush indicated that if such a bill made it out of Congress, he would sign the bill into law. I've written about this topic many times, as have many other commentators. What breaths new life into this subject is the fact that the Democrats now control the Congress, and Democrats have consistently indicated that the estate tax is an excellent way in which the federal government can raise revenue. You might think that being an elder law attorney-and a part of the general practice of elder law is estate planning - I want the estate tax to remain in existence. After all, if people are fearful that their estates will pay tax when they die, causing their children to receive less of an inheritance, then more people will come to me for estate planning. Well, that's somewhat true. I have plenty of clients who need to engage in estate planning whether the federal estate tax exists or not. So, with that little disclaimer, here are my thoughts on the federal estate tax and my opinion as to its future. As much as we all don't like it, a government raises money for the services that it provides one way, it levies a tax against its citizens. To some extent, all taxes are arbitrary. For instance, with regard to income tax, we have a graduated system where the more money you make the higher a percentage of your earnings you pay as income tax; however, that percentage caps at a certain amount of earnings and never increases. To most of us, this system of taxation seems somewhat fair; however, other countries place a much higher emphasis on sales and use taxes. What this shows is, governments can raise money through different forms of taxation and no one method is the correct method. [Read More!]

Many couples created Revocable ’Living’ Trusts before the 2001 changes in the tax law, which increased the personal estate tax exemption many-fold over what it was in earlier years. Just before the new law, the personal lifetime exemption was $675,000. For persons dying in years 2006, the exemption has been increased to $2  million, and the amount of this exemption will increase still further during the remaining years of this decade. Many of these older trusts contain directions to split the trust estate into mandatory sub-trusts upon the death of the first spouse. This mandatory split was usually designed to preserve each spouse’s personal exemption, and thereby reduce or eliminate estate taxes over the span of two deaths; the ultimate goal was to transmit the maximum gift to the couple’s remainder beneficiaries, usually their children. However, these trust provisions directing the creation and funding of sub-trusts often still assume the existence of the older, lower exemption amount. In the current climate, these trust provisions may now: (a) no longer be necessary, (b) may undermine the couple’s goal to leave to the surviving spouse full access to the couple’s entire estate, and/or (c) may now only be appropriate to much larger estates. Further, setting up the by-pass or irrevocable trust under these old instruments will cause extra tax preparing, filing headaches and expense. For Help click on Law Office of Steven J. Feldman

Recovery Account Information


Introduction

The California Department of Real Estate is the agency within California state government that issues real estate broker and salesperson licenses and public reports to subdividers of California real property. The Department also has the authority to revoke or suspend a license for violations of the Real Estate Law (Section 10000 et seq., of the Business and Professions Code). In addition, the Department administers a victim's fund, known as the Real Estate Recovery Account.

How It Works

The Recovery Account became operative on July 1, 1964 and is funded from a portion of the fees paid by licensees. It enables a person who has been defrauded or had trust funds converted by a real estate licensee in a transaction requiring that license, and who satisfies specified requirements (California Business and Professions Code Section 10471 et seq.) to recover at least some of his or her actual loss when the licensee has insufficient personal assets to pay for that loss.

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Congress Gives Little Tax Relief for AMT Migraine: John Wasik

May 15 (Bloomberg) — While the despised alternative minimum tax lives to see another year, long-term retirement investors can find some solace in the new U.S. tax bill.

In legislation expected to be signed by President George W. Bush, the alternative tax has survived largely because of the Congress's cowardice. The AMT's impact, though, is lessened because exemption amounts have been raised — at least for the 2006 tax year. Next year is another looming headache.

Stock investors in the top tax brackets fared the best as Congressional negotiators agreed to extend the 15 percent rate on capital gains and dividends. In contrast, those who own bonds, money-market funds, savings accounts or real-estate investment trusts will still pay as much as 35 percent on income from those vehicles.

The lower rates on stock dividends and gains are good through 2010 at least — and Congress may vote to extend them.

Congress again gave up on the idea of eliminating the alternative tax, which originally targeted the ultra-wealthy but increasingly ensnares middle-income families.

The new bill roughly extends the AMT exemption levels that were in effect for 2005: $42,500 for single filers and $62,500 for joint returns.

It is projected to hit some 30 million taxpayers in four years if Congress doesn't kill it. If you are subject to the tax now, you will lose personal exemptions and deductions on state/property taxes and miscellaneous expenses.

`Phantom' Taxes

Because of the loss of these write-offs, if you have to pay AMT, you are levied at ``phantom'' tax rates of as high as 35 percent — even if you are in a lower bracket before the tax.

Congress won't put the AMT out of its misery since it is projected to bring in $600 billion to $1.2 trillion over the next decade. As it stands, the levy largely nails home-owning families in states with the highest costs of living.

As Congress averted its gaze from the alternative tax issue, it created a modest vision of splendor for retirement investors.

Under the old rules, you couldn't convert a conventional or rollover Individual Retirement Account to a Roth IRA if your income was more than $100,000. That ceiling is eliminated under the new law.

Roth Conversions

Unlike 401(k)s, you pay taxes on money going into the Roth account, but you don't on withdrawals if you are more than 59 1/2 years of age and are in the plan for at least five years. There are also no penalties.

The new tax law will make Roth conversions much easier. Starting in 2010, you can convert your conventional IRA to a Roth. Of course, you will have to pay income tax on the conversion, although the new law will let you spread out the tax payments over three equal annual installments.

The savings over time after a conversion are substantial. If you are paying a 30 percent combined federal and state tax on the conversion amount, you would gain $386,472 versus leaving the money in a regular IRA. That's assuming an 8 percent rate of return on $100,000 compounding tax-free over 40 years.

Investors aged less than 45 who are consistent savers and won't need the money immediately upon retirement will fare best with Roth conversions. The Roth is also favored by those who are betting that tax rates will rise in the future.

``It's an opportunity to pay tax now and not in the future,'' says Sid Blum, a certified public accountant and fee- only financial planner at GreenLight Fee Only Advisors LLC in Evanston, Illinois, who did the Roth conversion analysis.

``But I would never recommend a Roth conversion without having other money to pay the tax. Something fairly liquid and low-returning like a certificate of deposit can be used.''

Benefits to Economy

The stated political impetus for extending the administration's tax cuts is to keep the U.S. economy robust and to create jobs. While the extension of the so-called Section 179 expensing of as much as $100,000 of business assets for another two years is a boon to firms, it's doubtful whether that write- off will create or maintain any jobs.

There's no credible academic evidence directly linking breaks on capital gains and dividends to increased employment or economic activity in the past two years. Yet there's little doubt as to who will benefit.

The lower rates on gains and dividends clearly assist the highest-bracket taxpayers. According to Statistics of Income tax- return figures from the U.S. Internal Revenue Service, of the $135 billion in ordinary dividends paid in the 2004 tax year, almost half of that amount — $66 billion — was reported by those making $200,000 or more in annual income. The next two income groups combined, from $50,000 to $100,000 and $100,000 to $200,000, totaled $46 billion.

Gains Favor Top Bracket

For those receiving net capital gains, the benefits to the highest-income groups were even more dramatic. Of the $440 billion in gains reported, the $200,000-plus group accounted for $342 billion of the total, eclipsing all of the lower-income taxpayers combined by a factor of three.

This newest mangling of egalitarian tax policy adds more layers of complexity and confers breaks to the minority of taxpayers who can curry favor with legislators.

Once again the anointed few can rhapsodize over their customized breaks while millions of middle-income earners will hear the dirge of the alternative tax again next year, still one of the most grating themes in personal financial planning.

To contact the writer of this column:
John F. Wasik in Chicago at jwasik@bloomberg.net. />
Last Updated: May 15, 2006 00:13 EDT

Real estate tax fraud has been sharply increasing, but so are criminal prosecutions and prison terms for real estate wrongdoers, according to a new report from the Internal Revenue Service.

The IRS said last week that the number of real estate fraud cases opened by its criminal investigators has doubled in the past three fiscal years alone. The average prison term handed out by federal judges to convicted real estate fraud perpetrators also has soared during the same time period — from 27 months to 41 months. Last year's number of cases that produced jail time hit a new high — a stunning 92.3 percent incarceration rate for people convicted of real estate frauds and con games.

What types of schemes are IRS investigators focusing on most intently? The report identified three in particular:

* Double sets of settlement statements. This involves defrauding lenders by preparing one set of closing documents for the property seller — reflecting the true selling price and other transaction details — and a second set for the lender, with an inflated selling price. This typically causes the lender to fund a loan that exceeds the property's true market value, and allows the dishonest participants in the fraud to pocket the excess proceeds.

But just as Al Capone went to the federal pokey because he didn't report his ill-gotten gains to the IRS, so too do home-sale fraudsters risk jail time when they fail to report the income they earn from their con games.

* Property flips. The IRS is especially interested in transactions where real estate investors puff up appraisals to induce quick flips of properties, then fail to report their profits to the Feds.

* Fraudulent qualifications. This involves “real estate agents assisting buyers who would not otherwise qualify” to purchase a particular home because of their poor credit history or income problems.

As an example of this form of fraud, the IRS cited the case of California real estate agent Satish Shetty, who was sentenced to 15 months in prison and ordered to pay $37,478 in restitutions last December 20. In a plea agreement, according to the IRS, Shetty admitted that he “submitted applications to lenders that contained false information used to approve” mortgages. Through a network of companies he controlled, according to the IRS, Shetty “entered into escrows to resell properties to 'straw' buyers at inflated prices.” The straw purchasers were not qualified for the loans, and quickly went into default. Shetty, meanwhile, pocketed the proceeds.

The bottom line from the IRS to real estate investors, appraisers, and agents thinking about fraud: We are doing more criminal investigations than ever, we're getting more convictions, and more than nine out of ten are ending up behind bars.

Don't do the crime if you can't do the time.

Posted on Sun, Apr. 30, 2006

REALTY MAILBAG

Q: I am a real estate broker with an opportunity to obtain a listing on a beautiful house. But there is one problem. The seller says her boyfriend moved out about 15 years ago and she hasn't heard from him since. When I checked the official title records, I see the seller and the boyfriend (with different last names) hold the title. The seller says they were never married. Is there any way this house can be sold now? The seller has paid all the mortgage payments since the boyfriend disappeared 15 years ago.

A: As a real estate agent, you were wise to check the title before listing that house for sale. From your description, it appears the title is unmarketable unless the missing boyfriend can be found.

The legal solution is for the co-owner to bring a quiet title lawsuit. Depending on the facts, her attorney can best advise what legal steps to take, such as hiring an investigator and publishing legal notices of the pending lawsuit to clear the title. If due diligence is used to locate the missing boyfriend, and if the court is satisfied he is either dead, cannot be located or has no title interest in the house, then the court can order the title ''quieted'' in the seller's name so she can sell.

REALTY MAILBAG
Posted on Sun, Apr. 23, 2006

Q: I am thinking of selling my home to one of those ''we buy houses'' companies. They claim to buy ''as is.'' They ask the seller to inform them of any repairs needed, but they also say if the seller does not inform them of any necessary repairs, they presume repairs are necessary anyway. This firm offered me a very low price.

If the offer is accepted, they perform an inspection before the contract is final. Does the fact that they assume repairs are necessary and that they highly discount the sales price change the seller's legal liability for repairs?

A: Most states, including Florida, have laws requiring home sellers to disclose known defects of the residence in writing. Making an ''as-is'' home sale is not a method to avoid liability for undisclosed defects of which you are aware.

If you sell to those professional buyers at a price heavily discounted from market value, you should insist on a written waiver in the sales contract that you have disclosed all known defects, and the buyer has investigated and will not hold you liable for any hidden defects that might become evident later.

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A seasoned attorney, before filing a lawsuit, often conducts an “asset search” of the proposed defendant. The person filing the lawsuit will want to know whether it is worthwhile to sue, and whether a judgment would be collectible.

Information about you and your assets is readily available from public records. An investigative firm can quickly gather all sorts of information about you — the location of your real property, bank and brokerage accounts, ownership of automobiles and water craft, business interests, any bankruptcy petitions you may have filed, plus all kinds of other personal information for a surprisingly low fee. Thus an attorney will be able to tell if the lawsuit is worth taking, based upon the ability to collect the potential judgment. Be aware that this information is available to almost anyone who knows how to go about obtaining it.

One key to an asset search is your name. By changing the name of the registered owner of a piece of property, you can change the ownership records, and your property will “disappear” from your asset information. Simple changes, such as recording the name of the owner of a piece of real property from William Smith to Bill Smith, or putting a piece of property in your spouse's name is not good enough. However, more innovative name changes can keep the true identity of the owner confidential.

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You have made some great investments in Real Estate or in a Stock Portfolio. Congratulations! Now you are ready to retire on your gains. But wait. To benefit from
your investment appreciation, you're going to have to sell some or all of those assets. If you sell your investment property, you will need to pay capital gains tax to the Federal Government, State, and you will also pay recaptured depreciation. If you're in California, add another 3 1/3% in withholding. That's a huge chunk of change, and a big blow to your savings. If you sell your stocks, you'll be giving up at least 15% to capital gains. There is also no guarantee that the long term capital gains rate will remain at 15% forever. It could increase down the road. How can you start receiving income but not get hit with huge amounts of tax? For real property, there is a 1031 exchange into a tenant in common property. This works well for investors that don't want to manage property anymore, but still enjoy the benefits of real estate ownership.

There is another powerful concept. It's called a Private Annuity Trust. These trusts have been around since 1939, but until the last few years have primarily been used for Estate Planning purposes. The Private Annuity Trust also works extremely well for Retirement Planning. It is fairly complex to set up and administrate, so many financial planners, real estate brokers, CPAs and Attorneys still don't know much about them. The procedure is basically this.
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Wealthy Grandparents setup Health and Education Exclusion Trusts, known as HEETs, to benefit Grandchildren without generation-skipping transfer tax, which is 47 percent for 2005. [Read More!]