Anonymous Purchases of Real Estate, and Thoughts on Series LLC's.

Sometimes, you don't want to be found, or want people to know what you own. I'll leave the reasons up to you, but often it makes good business sense to put a layer or two between you and everyone else.

Example 1: Someone knocks on your door. It's your neighbor. He says, "I want to lease your property for oil and gas." Ok, you say. He offers you a check for $1000 and a decent royalty interest. You think, "fair enough, I've lived her for 40 years and this place is never going to produce any oil."

Example 2: Someone knocks on your door. It's someone you have never met before, but they have an EXXON logo embroidered on their shirt. They say "I want to lease your property for oil and gas." You say, "ok, how much?" They say, "I'll pay you a $1000 bonus and give you a good royalty (same terms as before)." You say, "No way, you are EXXON, you can afford to pay me 100x that."

Perception matters. In the real estate business, where margins are everything, a little perception can mean all of your potential profit. So, instead of walking up to the bargaining table as a multi-billion dollar company, we can be EM LLC, and no one would be the wiser.

When you buy real property, there is usually (hopefully) a deed. This deed says who owned it before you, and that you are now the owner. You usually record this deed in the county office where the property is located, so all the world knows who owns what. Unless you do not want someone to know who owns what, at least your piece of what.

Enter "anonymous" purchases of real estate.

In theory, you could own real estate anonymously by never recording the deed of  whatever property you purchase, as this is not technically required by law. This makes property difficult to sell however, so that is probably not the route you commonly want to take.

Next comes the LLC or Trust ownership route.  If you currently own property in your name and want that to become anonymous, it becomes obvious if you simply transfer the property to an LLC or Trust owned/managed by you.  A better process would include having several intermediaries in between yourself and the final entity, but this will not stand up to a truly trained eye, either. All you have to do is go to the deed office and follow the chain of title.

If you are purchasing from a third party, consider a so called“blind trust.” Trusts are not recorded, and if you correctly set up the trust with a competent trustee that is more than a degree of separation away from you and your entity, you are doing pretty well. However, if you only employ the trust, you can run into liability issues if you retain management and control as the beneficiary of the trust. I would suggest coupling the trust with a limited liability entity, such as an LLC. I don’t love blind trusts, (unless you’re a politician trying to shield personal assets away from potential conflicts of interest you are legislating on), but in a limited use they could serve a function here.

In the LLC realm, as of 2009 Texas has approved the use of the Series LLC, which I do like for real estate or other asset based businesses as it provides the ability to separate the liability on a property by property or asset by asset basis. Again, LLC’s require disclosure statements, so it really depends how many layers of the onion you are willing to place between yourself and the potentially prying 3^rd party.  Coupling the series LLC with a “blind trust” as manager of the LLC is about as anonymous as you can get under the current law.

Another recommended route can be to place one of the onion layers in a different state or even a different country. For example, you could have an in-state LLC hold assets, which was owned by another out of state LLC, which was owned by an offshore, say, Cayman Islands entity. This would no doubt offer you the protection you require, but is expensive, tricky to set up, and requires some maintenance to make sure things don't go south.

Conclusion:  Sometimes you want to be anonymous, and it makes business sense to do so. I always recommend running your business under a limited liability entity (an LLC or Limited Partnership), because the chance that something could go wrong and you could personally be on the hook is always there. In the real property world, it is often imperative you do business like this. For the sellers out there, make sure you know who you are really dealing with. For the buyers, make sure you have taken every step to prevent getting the "Exxon" treatment.

After the probate hearing...what's left to do?

This could be part 2, a continuation of "what happens in a probate" series. I should have done "what happens before a probate hearing" but that can be a later prequel. Let's press on.

Basics:

After the hearing, assuming the court approves everything, you will walk away with "letters," testamentary if there was a will, or letters of administration if there was no will. Now what do you do?

These letters give you the power to do business on behalf of the estate, as if the deceased person was doing it. This means you can open and close bank accounts, pay off debts, and sell real estate.

You hope that there are no outstanding debts, but there almost always are.  When people pass away, you have burial expenses, last medical bills, last cellphone/credit card/power/cable etc., that have to be paid before you can start giving the grandkids their inheritance.  You have to pay these off, and if you do not and instead spend all the money or give it all away, you are personally liable for the debts. Make sure you do this right (If it was a "dependent" administration, you may be able to get out from paying some of the bills. This is a different discussion, for another day).  Further, creditors have up to 1 year from the probate hearing to send your their bills, and you must send a formal notice to secured creditors.

Further, you, as the executor or administrator, have to file a final inventory with the probate court. This is a "snapshot" of what the deceased person owned when they passed away. Exact bank account values, descriptions of real property, vehicles, insurance policies paid to the estate, investment accounts all this must be described and approved by the court.

Aside from this being required by law, there is a hidden benefit from this numbers on the inventory: the adjusted cost basis at death.

Adjusted Cost Basis Primer:

Certain assets are classified as "capital" assets, (for the IRS description, see here) but think your real estate, stocks, collectibles, furniture, or anything that you buy for your personal or investment purposes.  Whatever you buy it for is the item's "basis", or the bottom line for tax purposes. If you sell it, whatever it is, you will have to pay taxes on the difference between the basis and the final sale price. Of course you can have losses too, but we will keep things simple.  Depending on the type of asset and how long you hold it, the tax rates will fluctuate.  Regardless, you have to pay the tax, and it can be a significant amount. Here is the key: if you die holding one of these assets, then the basis becomes whatever its value was at the time you passed away.

According to 26 USC Sec. 1014, when you pass away with one of these capital assets, the basis becomes the fair market value at the date of the person's death, instead of whatever you paid for it. This can be a massive tax savings for your estate and beneficiaries, and one of the main reasons I think "probate avoidance" techniques do not make sense for most, if not all folks.

The most common scenario is that the decedent owned a house, which they lived in forever. They bought it for $100,000, now its worth $300,000. If they had sold it before they died or transferred it to their kids or heirs before they died, they would've had to pay the capital gains on the sale or their heirs would have received the house at the same basis as the decedent. When the heirs sell it, they pay the capital gains tax. At today's rates (15% for most folks, unless you make over $450k/year) here is how the math works:

$300k sale price - $100k cost basis = $200k capital gains x .15% = $30k in taxes due.

If they had waited and left the house to the kids by their will, the taxes would have been $0.

$30k in taxes to avoid paying a lawyer a couple grand to do your probate? That math does not add up. The same thing happens for anything that you transfer or sell before you pass away, and you do not get the basis adjustment.

Conclusion:

As the executor or administrator, you have some duties to fulfill. Get all the assets together, pay off the debts, and file a final inventory.  You might have heirs nagging you about "getting their money," but your duty is to the estate, not to the heirs. Also, you have to protect your own skin and not make sure you will be on the hook for any liability.  Finally, carefully go through all the assets, and see if there are adjusted cost basis tax savings to be had. If you look carefully, you can usually find them.

Yourtexasestateplan.com wishes all a happy and safe Independence Day.  Make sure if you leave the house, you have a designated driver.

Thoughts on the recent IRS mess

No one likes the IRS, and they are under the gun right now. But why? Is it really any different than it has been historically, or could we just be paying more attention in this digital media age?

Let's break down the "scandals".

1. Alleged audit targeting of "tea party" affiliated groups.

What happened:

Allegedly the IRS delayed/denied/targeted at a higher rate tea party affiliated groups who applied for tax exempt 501(c)4 status. This means, in a nutshell, that conservative pseudo lobbying groups had a tougher time getting their agendas across than liberal ones did, because they were stuck in a tax audit limbo that prevented them spending their money in the way other 501(c)4 groups could.

What is that and what does that mean in English:

A 501(c) entity is just the designation for tax-exempt status in the tax code. There are many types, (501(c)3 are your churches/religious organizations,  501(c)7 are your country clubs, and it goes on,  (including 501(c)21 black lung benefits trusts ) but 501(c)4 groups are supposed to be:

501(c)(4):

(A)Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

 

(B)Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.

 

Translate this to: volunteer firefighters and civic organizations. The trick is that they CAN contribute to political lobbying/activism/campaigns, as long as this is not their "primary" purpose. The real trick is that donors to these groups do not have to be reported to the IRS like political parties and Political Action Committees (or PACs or SUPER PACs). These groups outspend the PACs by a 3 to 2 margin, allegedly.

Analysis:

This targeting is obviously not ok, on any level, by a neutral government entity. It doesn't matter if it is the tea party or the toga party, this just stinks, as it seems "the Man" is targeting opposition groups, ala every dictatorship/oppressive regime we read about elsewhere in the world (see, Syria).

However, I just cannot believe this has not happened before, it was just exposed this time. If you have ever been audited, you might know how one works. If you have not, know that they are a pain. I don't think this was just a couple of "rogue agents," that is just not how the IRS works. Usually, the IRS targets a group or groups because they want to encourage litigation, with the ultimate result of getting court cases that mean more tax revenues for them. A few years ago, it was Family Limited Partnerships, as they were getting big deductions and the IRS didn't like it. It is cyclical, and its just the way it is. You just hope the taxpayer wins in court.

If you were President, would you use the powers at be to exert a little pressure in whatever way you could, on the people who spend all day every day trying to take your job or worse, going as far to say you lied about where you was born.  So maybe there was a memo, but who's to say.  You want to

The real quagmire is that both conservative and liberal groups use the 501(c)4 gimmick to influence elections. Requiring disclosures of the donations like they do for political parties and PAC's might fix it, or just scrap the political influence ability of the nonprofits all together. It is just not that hard:clean up the ability of the big money power brokers to buy elections. Campaign finance reform seems to crawl along at a snail's pace, so don't hold your breath on this one. Instead of ceremonially firing a top official who was about to retire anyway, hopefully the IRS will fix this at the source.

2. IRS Spends $50 million on 220 employee conferences over 3 years.

This one looks pretty bad, in the times of people hurting and growing distrust of where our tax money goes, and rocketing national debt. But was it?

What happened:

Reports have come out detailing these events, including a video of employees line dancing, lavish hotel rooms, and other perks. The IRS admitted to it and says it fixed the problem.

Analysis:

C'mon man. Who cares? I get it, "It is our tax dollars!" The math is not that bad though. This expenditure from an IRS budget that runs about $12 billion a year comes out to, wait for it, 0.139%. The same story claims they have already slashed this, and cut back on expenses.

The real problem comes with our perception of the IRS. Nobody likes paying taxes, but we all like roads, hospitals, schools, etc. Some of us cheat on our taxes, others do not, and we all suffer for those who do not pay their fair share. This means tax rates go up, because we must factor in the cost of those who just will not pay.  The IRS reports this "tax gap", what should be collected from what actually is, at $385 million as of 2006, while others report it could be as high as $600 billion. Makes $12 billion look like a pretty small number to throw at that big of a problem, and $50 million to make these tax collectors happy and motivated a small drop in the bucket. Companies have conventions. They have motivational speakers. They have conga lines. They go into the woods and do trust falls.

Next, we have to come to terms that the IRS is a company, with people working there. I don't like a lot of the IRS folks I have dealt with, but my disdain is probably rooted in the same emotions that caused me not to like my childhood dentist (you know who you are). On the flip side, I have had some great experiences with IRS agents, and I have friends and colleagues who work there. My point is, like google, apple, or any company, to attract and retain talent, not to mention keep workers happy, you need a little line dancing once in a while. If baseball tickets equal higher tax compliance, I'll share the collective bill. Presidential suites are pushing it, so IRS don't get carried away. Would anyone care if this was a report on Goldman Sachs or Amazon? Didn't think so.

Conclusion:

To have the society as we know it, we have to collect taxes. There are good ways to do this, and bad, depending on who you ask. Yes, the IRS has some straightening up to do. Should we cut them so slack? Noway. However, we can also think about the task they have, how important it is for all of us, and remember there are people behind the mask too.
 

What happens in a probate hearing

We have talked about the P-Word before, but I still have clients that are scared of it. The root of that fear is often THE HEARING. IN COURT.

Let's dispel some myths.

If you're the executor or executrix of a will, or the adminstrator/adminstratix of an adminstration, this is what you can expect.

Scenario #1: Everyone gets along, and there is a valid Will.

Proate hearing in a Courtroom

Venue: First off, the proper county is where the person lived for the last bit of their life, or where they had some property (see TX Probate code Sec. 6.).

In some counties, (like Dallas, Fannin, Tarrant, and Hunt, to name a few), the hearings are held in a crowded courtroom, and dozens of cases are heard one after another.

Informal, office probate hearing

     

In other counties (Grayson, Collin, mostly the smaller counties but it really depends on the judge and if there is a statutory probate court), the hearing is often less formal, with the judge often shaking your hand at the door to his or her office, and then showing you to a chair right there in the office. You are still giving sworn testimony, but just from a comfy chair instead of a in a courtroom. Either way, its no big deal.

Proceedings: At the hearing, you will be sworn in, just like you are giving any other testimony in any court. This makes some people scared. Don't be. Next, you essentially say "yes" or "no" to a list of facts about your deceased relative or friend. "Did they live in this county when they died.... Yes." "Did they have any children born after this will was written...Yes or No (tell the truth). "Is this their last will and testament, and does this appear to be their signature...Yes (it better be)." Easy stuff. Next,  judge will then sign an order admitting the will to probate, and you sign several pieces of paper including an "Oath" which is you just swearing that you will do the right thing as the executor or administrator.

After the hearing, you go to the clerk's office and get Letters Testamentary or Letters of Administration which will allow you to go to banks, financial institutions, and other places in order to handle the business of the estate. You will also sign a required notice to creditors, that must be published so that anyone who things the deceased person owes them money can make a claim.

Final Steps:  Within 90 days of qualifying as executor or administrator, you must file an inventory with the court. If you need extra time, the court will usually let you have it. The inventory lists all the assets which pass under the decedent's will or estate, and not those that are directly distributed out (like POD accounts or insurance to others). After the inventory is filed, the judge will sign an order approving the inventory. Then you're pretty much done with the formal work, all that is left is paying the bills, filing a final income tax return (and an estate tax return if necessary) and distributing the estate. Remember that creditors have 1 year to come back and request you pay them debts, so it is usually a good practice to leave some funds in an account for that.

Note: Small estate administrations and muniments of title are similar to this, with less requirements.

Scenario #2: Everyone gets along, and there is no will.

Venue: Always the same, unless its contested, then it might get sent to District Court.

Proceedings: Since there is no will, an Attorney Ad Litem will have been appointed to do background research and determine the heirs. They will be at the hearing, and the estate has to pay them (think of this as the I HAD NO WILL tax). The Probate Code requires that you have witnesses if there is no will, think of these as close friends who knew the family, but are not inheriting anything. Some courts will let you get away with 1, many require 2. Sometimes you can have this done by an affidavit, so just check with the specific court. Everything else is the same.

Final Steps: Same as above.

Scenario #3: No one gets along, and there is a valid Will

Venue: Same as above, if there is not a contest to the will.

Proceedings: If the will names an independent executor, and this is not challenged, all is the same. Else, you have a fight on your hands, and this is where things get messy. Make sure your lawyer knows their stuff. Else, if you can actually get it to the probate hearing, its all the same.

Final Steps: Same, and good luck getting your family to agree on who gets Dad's old boots or Mom's favorite china.

Scenario #4: No one gets along, no will.

Venue: Same as above, depending on the county.

Proceedings: Now you are stuck in Dependent Administration land, which we have discussed before. This means you will be in court, a lot, and your legal bills will be high. Can't we all just get along?

Final Steps: Dependent administrations require annual accountings as well as a final. There are also some more paperwork to deal with, as well as dealing with creditors claims.

Final Thoughts

Most of probate is easy, and not scary. If you have a fight, it is no different from any other lawsuit, and those can be scary. Just make sure you know what you are getting yourself into before you show up at the courthouse unprepared.

For the Moms

Mother's day is coming up. All of us, whether we know them or not, have one.  If they are in your life, wonderful. If not, I'm sure you either know of a mom out there somewhere who could use a nice word of encouragement, or just an afternoon of help in her mom-duties.

For those of you who are still trying to scramble for a last minute mother's day gift, skip the flowers or the card. It's time you gave the gift of some estate planning and tax advice to the mother in your life.

Here is a list of some of the great gifts you could give that special mom out there:


1.  Designation of Guardian of a Child Advance- In Texas, a competent adult guardian of a minor child can designate a backup guardian in case they become disabled or pass away. You can also do this in a Will, but in the event there is not Will, this is a good safety valve. This allows mom to rest easy, knowing that who she wants to take care of her child, will.

2. Help her make a Will- Beat the person who offers just number 1, and help her actually make a will. You can combine the designation of a child guardian, and this way you can set up an estate plan or a trust that will provide the comfort that knowing your children will be taken care of provides.

3. Educate her about Tax Savings- The more kids you have...the more you get child tax credits! Educate the mom in your life to make sure she is getting all the appropriate income tax credits and deductions. See here.

4. Educate Mom about Life Insurance, and Savings Accounts- If your mom has work sponsored or even just a life insurance policy, make sure it is left to the right person(s), or in a way that it will take care of their loved ones. Also, tell them to make sure and check any bank, savings, or investment accounts, to that the proper beneficiary designations are made.

OR, scrap all this, and get her some cupcakes or chocolate covered strawberries.

Special thanks to all you moms out there. I, and the rest of us wouldn't be here without you.