North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

Hawaii is on the verge of a step forward in the field of asset protection, with pending legislation awaiting the Governor's signature that, if signed, would extend the shield of creditor protection available to married couples. Hawaii is among a group of states, approximately half in the nation, to recognize property held in tenancy by the entirety (TBE). Tenancy by the entirety is a form of property ownership in which each spouse owns the entire interest in the property; it is similar to joint tenancy with right of survivorship, but unlike joint tenancy, it can be established only between a husband and wife. While both spouses typically have equal right to use the property that is owned as tenants by the entirety, neither can sell, lease, or transfer the property without the other's written consent. Upon death of one spouse, ownership of the property transfers automatically to the surviving spouse, thereby avoiding the cost and trouble of probate. Thus, property held in TBE cannot be transferred by will, but instead goes directly to the surviving spouse, who is then free to dispose of the property through will at his or her death.

North Carolina is also among the states that recognize TBE, allowing married couples to own real property in TBE when intent to own the property as tenants by the entirety is manifested in the deed. Among the foremost advantages to TBE ownership is the protection it provides against creditor claims of just one spouse. In order to reach property owned as tenants by the entirety, there must be a claim against both spouses jointly. However, property might not remain in a TBE indefinitely. Events such as divorce, conveyance of title in the property to one spouse, or conveyance of the property into a trust can convert ownership in the property to a tenancy in common or joint tenancy, thereby forfeiting the creditor protection provided by the tenancy in common. Thus, transferring property held under TBE into a trust would give creditors of each individual spouse a valid claim over that spouse's one-half interest in the property.

 

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The IRS has begun checking land records in certain states, including North Carolina, to compare uncompensated, mainly intra-family gifts of real property to filed gift tax returns.  Generally, gifts of any property over the $13,000 annual exclusion (up from $10,000 a few years ago) must be reported on a federal gift tax return for the year.  See this recent Forbes article.

I encounter situations frequently where no gift tax returns where filed for gifts of real estate. Real estate lawyers who draft the deeds often do not advise clients on the tax consequences of the gift. Before ANY gift of real estate, persons should consult with tax counsel.  There are also income (capital gains) tax issues to consider

If you have made any such transfers in the past, see a CPA or tax attorney immediately about filing the overdue returns.  For North Carolina real property, gifts prior to 2009 must be reported on a North Carolina gift tax return as well, and any applicable tax paid.

 

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Effective October 1, 2011, fees for recording documents in North Carolina's 100 Registers of Deeds will increase:

1. Deeds - $26.00 for up to 15 pages.  $4.00 for each additional page.
2. Deeds of Trusts/Mortgages - $56.00 for up to 15 pages. $4.00 for each additional page.

Formatting changes include a reduction in acceptable side margins from one-half inch to one-quarter inch and acceptable font from 10 points to nine point.  For deeds and deeds of trust, the drafter's name (a law firm name suffices) must appear on the first page of the document.

Another change is that satisfaction of deeds of trusts or mortgages by presentation of the original instrument (marked "paid" or "satisfied" will no longer be available after September 30, 2011.  Creditors must submit a satisfaction record within 30 days of full payment of the obligation.

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For many people, the federal home sale gain exclusion is the single most valuable tax break available. But if you're getting divorced and selling a home, you may need to plan ahead to take advantage of the tax break. We'll explain why, but first, here's a little background information.

Gain Exclusion Basics

If you're unmarried, you can potentially sell a principal residence for a profit of up to $250,000

Q. If I take the exclusion of capital gain tax on the sale of my home this year, can I also take the exclusion again if I sell another home in the future? A. Yes. With the exception of the two-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of a principal residence, as long as you meet the ownership and use tests.

without owing any federal tax to the U.S. Treasury. If you're married and file jointly for the year of sale, you can potentially exclude up to $500,000 of gain. To qualify, you generally must pass both of the following tests:

1. You must have owned the property for at least two years during the five-year period ending on the sale date (referred to as the ownership test).

2. You must have used the property as a principal residence for at least two years during the same five-year period (referred to as the use test).

To be eligible for the $500,000 joint-filer exclusion, at least one spouse must pass the ownership test and both spouses must pass the use test.

If you excluded a gain from an earlier principal residence sale under these rules, you generally must wait at least two years before taking advantage of the tax break again. The $500,000 joint filer exclusion is only available when both spouses have not claimed an exclusion for an earlier sale within two years of the sale date in question.

Of course, home sales often occur in divorce situations and the cash from this tax break can come in handy.

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From a recent AARP report: reverse mortgages offer older homeowners a way to tap home equity to meet financial needs in retirement. However, the collapse of the mortgage market in 2008–2009 has led to major changes that impact consumer choices. While consumers have more product choices, reverse mortgages are generally more expensive and more complicated—leading to more scrutiny from Congress and regulatory agencies charged with protecting consumers.

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You know the importance of having a will. If you die "intestate" (without a will in legal language), your state's laws will determine the disposition of your assets. Your actual wishes will be irrelevant, even though they may be well-known to your friends and relatives.

An Effective Will     Here are three basic things you should cover:     Executor Designation. The executor is the person who becomes legally responsible for wrapping up your affairs after you die. He or she will pay outstanding bills, file any necessary tax returns, make tax payments, and dole out the remaining assets as instructed by your will. You should name at least one alternate choice, in case the first choice doesn't work out.     Asset Disposition Instructions. A properly drafted will generally heads off disputes regarding which heirs get which assets.     Guardian Designation. The guardian takes legal charge of your minor children, if you (and your spouse) die. Designate at least one alternate in case your first choice is unable to fulfill the role. For more information, click here to read our previous article, "Picking a Guardian for Your Kids"

But even if you do have a will, here is a critical point: Your will has no effect on asset distributions that automatically occur upon your death under "operation of law."

The most common applications of the "operation of law" principle is with life insurance death benefits and tax-advantaged retirement accounts.

For example, whoever you designate as the beneficiary of your life insurance policy will automatically receive the death benefit proceeds. It doesn't matter what your will says about who should receive the money.

Similarly, the person or persons designated as the beneficiary of your tax-deferred retirement account, traditional IRA, or Roth IRA will automatically receive that money by "operation of law." It makes no difference if your will contains contrary instructions.

Another example: When you co-own real estate with someone in "joint tenancy with right of survivorship," that co-owner automatically inherits the whole property, regardless of what your will says.

You may have other assets that are affected by the "operation of law" rules. Talk with your estate planning adviser to ensure your wishes are carried out.

Finally, at the same time you have your will drafted or revised, be sure to get all your beneficiary designations and real property ownership arrangements in line with your current intentions about who should receive what, after you die.

From today's TrustCounsel eNewsletter.

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Recently, I heard a story about a family who used a reverse mortgage. The mother has Alzheimer’s but is in great physical health. The father was in good health and was caring for the mother. The son was recently out of work and decided it would be a good time to move back to help his father care for his mother. The parents recently qualified for Medicaid, but had a reverse mortgage line of credit to help in the event of emergencies. The house is worth $175,000.00 and they owe $35,000.00 on the reverse mortgage. The parents had intended to leave their estate, which consisted primarily of the house, to their son.

The father suffered a heart attack and passed away suddenly. The mother is physically “healthy as a horse,” as are many people who suffer from Alzheimer’s, and may have many years of life left. The son, however, may not be able to provide care for her for the rest of her life.

THE PROBLEM: If the mother has to go into a nursing home and is there for over a year, the reverse mortgage will be called. The mother and son, unable to repay it, will lose the house. The mortgage company will auction or sell the house and any money left over from the sale will go back to the mother, which will kick her off Medicaid. The parents’ lives of hard work to pay off their home and to have something to pass on to their loyal son may be lost in the blink of an eye.

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Effective January 1, 2010, all new North Carolina deeds must contain the address of both the grantor and grantee as well as a statement indicating whether the property contains the primary residence of the the grantor. 

The person who presents the deed for recording at the register of deeds is responsible for reporting the correct amount of documentary stamp tax due (currently $2.00 per $1,000 of consideration).

For the text of the laws, click "Continue Reading."

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The National Consumer Law Center has come out with a report detailing the risks of reverse mortgages for senior homeowners.  Because of high fees, interest rates and other issues, I generally do not recommend reverse mortgages, although for some they may be the only feasible way to access cash.

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I often have clients ask about "getting a deed" when they inherit real property.  My response is usually "you don't need one."  In North Carolina, in most cases, no deed is necessary to transfer and evidence ownership of inherited real estate. 

North Carolina law provides that "[t]he title to real property of a decedent is vested in his heirs as of the time of his death; but the title to real property of a decedent devised under a valid probated will becomes vested in the devisees and shall relate back to the decedent's death, subject to the provisions of G.S. 31-39."  North Carolina General Statutes Section 28A-15-2(b).

What this means is that (1) if someone dies without a will, his or her next of kin (as determined under NC law) immediately own the property; and (2) if someone does will a valid will, the beneficiaries of the property under the will immediately own the property.  In both cases, the administrator or executor of the estate can sell the property only if necessary to pay debts and expenses.  An exception is if the property is devised to the executor of the will with instructions to sell the property.

Other than a sale necessary to pay debts and expenses, once the real property is vested in the heirs or beneficiaries, it can only be sold if all of the new owners and their spouses agree.  If the parties cannot agree on the sale, or if one of the owners or spouses is unavailable, a court proceeding for partition or sale in lieu of partition must be filed.  This is a long and expensive process.  If a minor child becomes the owner of real property, it also cannot be sold without a court order.

Since deeds are not necessary under North Carolina law, the evidence of ownership for inherited real property is (1) the death certificate and (2) the probate file (with the will, if any).  If the real property is located in a county other than the county of the decedent's residence, these documents must also be filed in the county in which the real property is located.

Because of the complications involved under this system, often the best way to transfer real estate is with a living trust.  A living trust generally gives the trustee the power to sell and avoids many of the problems inherent under NC law.  This is particularly true for residents of other states who own property in North Carolina.

 

 

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As of July 10, 2009, there is no longer any doubt as to whether real property owners in North Carolina can create unequal joint tenancy with right of survivorship interests.

Session Law 2009-268, amending N.C.G.S. Section 41-2.

Example: A owns blackacre.  A can deed blackacre to himself, with a 1/2 interest, and B and C, each with a 1/4 interest.  When one owner dies, that owner's share is divided pro-rata according to the surviving owners' respective interests (unless otherwise provided in the deed).  Thus, if B died, 1/3 of his share would belong to C, and a 2/3 share would go to A.

Note:  Unequal tenancy in common interests have been commonly used for years without any dispute about whether such interests were allowable under the law.  However, such interests do not pass to the surviving owners by operation of law, and must be devised under a Will or Trust.

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I had a new client come in yesterday, and we were discussing including asset protection in his estate plan.  He mentioned he had recently been sued for lead paint related issues by the tenant of an older rental home he owned in another state.  Now many of his personal assets may be at risk for any judgment rendered against him.  Even if that's not the ultimate result, he may have months or years of worry before the outcome is determined.

That's a perfect example of why rental property should be owned by a limited liability company (LLC), rather than individually.  LLCs shield ones personal assets from liability associated with the property, whether it's as a result of an injured tenant or even guest of a tenant.  It's hard to foresee all the types of liability that may exist, but an LLC can help protect against them all. 

By the way, I practice what I preach - my office condominium is owned by an LLC I established, even though my law firm is the only tenant.  I hope that no liability will ever result from this building, but the LLC certainly helps me sleep at night!

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First-Time Homebuyers Have Several Options to Maximize New Tax Credit  

WASHINGTON — As part of the Treasury Department’s consumer outreach effort and with the April 15 individual tax filing deadline approaching, the Internal Revenue Service today began a concerted effort to educate taxpayers about additional options at their disposal to claim the new $8,000 first-time homebuyer credit for 2009 home purchases. For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.

The Treasury Department encourages taxpayers to explore these options to maximize their credit and get their money back as fast as possible.

“The new credit can get money in the pockets of first-time homebuyers quickly,” said IRS Commissioner Doug Shulman. “For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.”

First-time homebuyers represent a significant portion of existing single-family home sales. The expansion in the first-time homebuyer credit will make it easier for first-time homebuyers to enter the housing market this year.

Under the American Recovery and Reinvestment Act of 2009, qualifying taxpayers who purchase a home before Dec. 1 receive up to $8,000, or $4,000 for married individuals filing separately. People can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.

 

 

 

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The American Recovery and Reinvestment Act of 2009 increased the allowable amount of federally insured reverse mortgages to $625,000, up from $417,000.  The increase is effective for the remainder of the year.

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I recently blogged about my disagreement with the North Carolina State Employees Credit Union's policy on mortgages when the property was previously held in the owner's living trust.  Somehow SECU became aware of my post, sent me a letter by email objecting to my statements, which, in the interest of fairness, I thought I should share.  Click "Continue Reading" for the text of the letter.

By the way, I still find SECU's policy to be unfair to those members who have living trusts, but, of course, that's only my opinion.

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From today's IRS Newswire:

WASHINGTON — The Internal Revenue Service announced today that taxpayers who qualify for the first-time homebuyer credit and purchase a home this year before Dec. 1 have a special option available for claiming the tax credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.

Qualifying taxpayers who buy a home this year before Dec. 1 can get up to $8,000, or $4,000 for married filing separately.

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My standard advice for clients who are transferring real property to their revocable living trusts is to check with their title insurance company to make sure they will still be covered.  For those insured by Chapel Hill's own Investors Title Insurance Company, all that is required is to notify Investors, who will then issue a simple amendment, at no charge, to show the trust as the insured.  Hopefully other insurers will do the same.

Also, don't forget to check with your homeowners insurance policy to ensure continued coverage.

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I have long known that the North Carolina State Employees Credit Union (SECU) refuses to refinance any residence owned by a revocable  living trust.  Their explanation is that they do not have the legal expertise to determine whether the trust affects the borrower's legal title and powers to the property.  Other lenders solve this by having an attorney (usually the one who drafted the trust) certify that the trust will not adversely affect the loan transaction.

For my clients that chose to work with SECU,  we would simply deed the house out of the trust to the client, and then after the closing, deed it back to the trust.  Some trouble and expense, but nothing major.

Last week, a client of mine had been told by SECU that she could refinance without using an attorney or updating her title insurance.  However, when they found that the home had been transferred in and out of the trust, they required that she use an attorney for the closing and obtain updated title insurance.  This will end up costing her another $800 or so. 

I spoke to Hill Scott, with SECU in Raleigh, on behalf of my client, but my pleas fell on deaf ears. I asked to speak to an attorney with SECU (someone who can understand what a revocable living trust is), but was told by Mr. Scott that SECU has no attorneys on staff!

Bottom line - If you have titled your home in your living trust, and insist on working with SECU when refinancing your mortgage, be aware that the costs of the transaction may increase significantly due to SECU's inane policies.

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In 2008, 0.84% of housing units in North Carolina went into foreclosure, placing us at number 27 among the 50 states and Washington D.C..  The actual number of houses going into foreclosure was 33,819.

The state with the largest number of foreclosures was Nevada, at 7.29%, with Florida, Arizona, California and Colorado rounding out the top five.  Bucolic Vermont ranked last at 0.04%.

Source:  RealtyTrac, Inc.

 

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A colleague of mine, Dennis Toman of Greensboro, contacted the North Carolina Deparment of Insurance about the issue of insuring homes owned by living trusts.  Bernard Cox, assistant to the Deputy Commissioner, stated that:

We tend to agree with your insurance company that the manual eligibility rule for HO policies would allow this arrangement [keeping the homeowners policy in the name of the individual owner and naming the trust as an addtional insured]. The individual maintains an insurable interest as long as he/she remains primary resident and has life time rights. I am stating the rule would allow it but individual companies do have different underwriting requirements, please understand.
 

This is good news, but those who own real estate in their living trusts should always check with their insurer.  I am informed that GEICO will allow the above-referenced method.

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No - in most cases.  Mortgages generally contain "Due on Sale" clauses, which say that the lender can call the mortgage due upon transfer of property.  However, federal law (12 USC § 1701j-3(d)) provides a number of exceptions (emphasis added):
 
(d) Exemption of specified transfers or dispositions

With respect to a real property loan secured by a lien on residential real
property containing less than five dwelling units, including a lien on the
stock allocated to a dwelling unit in a cooperative housing corporation, or
on a residential manufactured home, a lender may not exercise its option
pursuant to a due-on-sale clause upon—

(1) the creation of a lien or other encumbrance subordinate to the lender’s
security instrument which does not relate to a transfer of rights of
occupancy in the property;

(2) the creation of a purchase money security interest for household
appliances;

(3) a transfer by devise, descent, or operation of law on the death of a
joint tenant or tenant by the entirety;

(4) the granting of a leasehold interest of three years or less not
containing an option to purchase;

(5) a transfer to a relative resulting from the death of a borrower;

(6) a transfer where the spouse or children of the borrower become an owner
of the property;

(7) a transfer resulting from a decree of a dissolution of marriage, legal
separation agreement, or from an incidental property settlement agreement,
by which the spouse of the borrower becomes an owner of the property;

(8) a transfer into an inter vivos trust in which the borrower is and
remains a beneficiary and which does not relate to a transfer of rights of
occupancy in the property; or

(9) any other transfer or disposition described in regulations prescribed by
the Federal Home Loan Bank Board.

 

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Anyone who owns rental real estate in his or her individual name is taking a tremendous risk.  Suppose your tenant, or one of the tenant's guests, gets hurt on your property and sues the owner of the property.  That's you!  And any judgment against you can be satisfied from other property you own, such as bank accounts, investments, and other real estate, even your home.  While liability insurance is a good idea, it alone should not be relied upon for protection.

That's why I advise all of my clients who own rental real estate to form an Limited Liability Company (LLC) and transfer ownership of the property to the LLC.  Assuming the LLC is managed properly, this technique will shelter all of your other assets in the event of lawsuit involving the property.

For maximum protection, each rental property should be owned by a separate LLC.  For persons with more than 3 or 4 properties, it often makes sense to consider a Series LLC.  A Series LLC is basically one LLC with several sub LLCs, which can reduce filing fees and administrative costs.

At present, Series LLCs cannot be formed under North Carolina law, but it is possible to have an LLC established in another state own property in North Carolina.

It is possible to establish an LLC without the benefit of legal counsel, but I strongly advise against it.  All of the proper formalities must be followed in order for an LLC to function properly and provide the full protection available by law.

 

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The Housing and Economic Recovery Act of 2008 more than doubled the home value (now up to $417,000) to be used nationwide for establishing the size of loans available from the federal reverse mortgage program.  Loan origination fees were also lowered.

A reverse mortgage allows persons over age 62 to get lines of credit or cash payments based on the equity in their homes. Repayment is not required as long as borrowers remain in their homes.  Reasons for obtaining a reverse mortgage include paying off an existing mortgage, paying property taxes and getting cash to pay for daily living expenses.

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By Chris Burti, Vice President, Senior Legal Counsel, Statewide Title, Inc.

Elder Law is becoming a burgeoning practice area as the Baby Boomer Generation is rapidly beginning to gray out. This group has arguably accumulated more wealth as a group than any prior generation and has paid more taxes to support entitlement programs than any have previously. Not surprisingly, its members are trying to retain as much of this wealth as possible and pass it on to the next generation while lawfully maximizing their rights to participate in governmental entitlement programs. The Federal Government’s attempts to cut costs by restricting these entitlements has given rise to a concentrated effort among Elder Law practitioners to develop mechanisms to legally retain assets within the family while qualifying for benefits.

 

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