What Creates Joint Property?

There are many different combinations that would determine what creates joint property. First of all, what kind of property are we talking about? Do you share real estate? Are you a partner in a business where it’s the business entity that owns property? How many owners are there?

Let’s break it down so we can determine what the value, responsibility, and ownership rights are and what happens if there is a transfer, sale or dispute where an attorney might need to get involved.

What kinds of joint property configurations are there?

At the base case, there is joint property, where more than one person owns it. But within the concept of joint ownership, there are a few segments:

Tenancy in Common –

This is where there is more than one person who owns the property. Typically, in a joint tenancy, there are agreements between the owners, because some owners may own a higher percentage of the property than others. This would then create a differentiation in the rights and responsibilities those owners have to the property.

For instance, let’s say three friends decide to buy a vacation home. One of the friends may live close by and want to use it more often than the other two. So, they may decide that Friend #1 will pay 50% of the cost of the house and the other two would each pay 25%. This would require an agreement between the three, not only for the mortgage payments and ownership rights, but potentially for the maintenance, utility and repair costs as well.

Another example is when siblings or even cousins inherit property that at least some of which want to keep and used.

An attorney would be useful in this case to draw up an agreement so everyone is very clear on their responsibility to paying for and maintaining the house as well as the frequency that they could use it.

Also important, if one of the friends decided to sell his share of the house, would the other two have rights of first refusal to buy his shares? Or could that friend sell to someone else? All of these points should be agreed to prior to getting into the arrangement.

Joint Tenancy –

This is where each person owns an equal portion of the property. In this case, the owners are typically a husband and wife who buy a house or own property where a business resides.

Joint tenancy is an easier arrangement because if one spouse dies, the other would automatically take control over the full property ownership.

However, in a tenancy in common arrangement, it become a bit more complex because there are more than one party that owns the property.

If one member of a tenancy in common agreement dies, the others cannot simply split their share among the surviving members. First, it is important to assess if the deceased person left a will. If so, whomever they bequeathed their share of the property to would be the rightful owner. If not the laws of intestate succession would apply, and blood relatives of the deceased will own a share of the property. Other complication result id the decedent’s estate has too much debt. In which case the decedent’s interest may have to be sold to satisfy the creditors. I similar problem would exist is the tenant in common files bankruptcy.

Here is the tricky part of having a tenancy in common partnership with property. Let’s go back to the three friends who decide to buy a vacation home together. Then one person dies. The other two people do not automatically get to split that person’s share.

That person may have a will and stipulates in their will that their shares would go to a relative or friend. He may also leave his shares to a non-profit organization. It is not up to the other two partners to determine what happens to his share.

Of course, if the three friends actually think about the “what ifs” when they enter into the agreement, they can consult with an attorney and, as part of their agreement, determine up front what would happen if one of them dies or wants to sell his shares.

By thinking about these scenarios in advance, they each can utilize this agreement and refer to it in their wills, so there is not dispute later on. This way, no relative, friends or other person can claim rights to the share of the property.

If you are thinking about entering into a tenancy in common partnership for buying a property, here are some tips to consider:

  • Make sure you are clear about your intentions: will everyone be using the property in equal amounts of time? Is the property meant to be used by the partners or will you want to use it as an investment?
  • Agree to the circumstances if someone wants out: Like a prenup, it is always a good idea to consider the “what ifs” of a partnership breaking apart. One person may fall on hard economic times and may not be able to afford to pay their share of a mortgage. There could be a falling out among the partners. You go into these relationships with good faith, but you never know what could happen.
  • What if someone dies: Have you all included the terms in your estate planning? Don’t leave it up to your executor and the surviving parties to battle it out.
  • Work with a knowledgeable attorney to write up your agreement: This is not a back of the napkin kind of document to write up together over a beer. Having a professional who can anticipate any other circumstances that may arise is an important ingredient to any successful partnership. Then you can relax knowing your interests are covered.

Regardless of the type of property and who you are entering into it with, what creates joint property headaches could take all of the fun out of ownership. Anticipating any pitfalls ahead of time is key with any type of partnership. Work with a reputable real estate attorney to ensure peace of mind for all parties involved.

Ep 102: Capital Gains and Real Estate Tax Law Planning

With a new tax plan from the current White House administration becoming a distinct possibility, it leaves many Americans wondering about capital gains as it applies to real estate transactions. With the plan still in the discussion phase, there are few concrete details about what new capital gains rates could eventually be if it were to go through, but even the likelihood of the plan passing has many people asking what they can do to maximize their investments.

In terms of selling a personal residence or real estate that is held for investment or business use, it is crucial to look at what capital gains rates have been, and what they could be sometime soon.

Capital Gains Rates Now

Until the law concerning capital gains rates is changed, the rates are typically 15 to 20 percent depending upon whether an individual makes more than $250,000 or not. In addition to this, there is 3.8% that gets added to that investment income coming out of Obamacare for people who make more than $250,000.

The capital gains rate is 15% for people who:

  • make $400,000 or less if they are single
  • make $450,000 or less if they are married

And in addition, an individual making more than $250K a year has a 3.8% Obamacare net investment income tax added to that. Prior to this year, the maximum gain someone would be required to pay on a capital gains transaction is 23.8% which is essentially the 20% plus the 3.8%.

Capital Gains Rates and the Future

During the last year and a half and even prior to that, the government has spent a great deal of money due to COVID and other reasons. Because of this significant uptick in spending, it is not inconceivable that Americans will see a tax increase.

The new administration has already proposed an aggressive tax increase that would raise capital gains rates significantly, to as high as the mid-40s. While this is possible, some consider it even more likely that instead of the rates going from 23.8% to the 44%, the tax hike will instead put the maximum rate at 28%. This rate would only be reached with compromise.

America has had capital gains rates in the past of 28% so it is possible they will see them again if the tax plan passes. In light of this, it could be prudent for investors who are looking at potentially large capital gains transactions to anticipate a 28% rate in the near future.

Realistically, an individual who sells something now will continue to be at the lower tax rate, but if they decide to sell it toward the end of the year or after, it could very well be at a much higher rate.

The Potential Effect of Higher Capital Gains Rates on the Market

The fact that Americans are anticipating higher capital gains rates has had an effect on the market to a certain extent. Most people who are facing capital gains transactions have one of two reactions:

  1. “I need to do it now while the rates are lower.”
  2. “I’m not going to sell that stock or real estate ever because I’m not going to pay that kind of tax.”

The second reaction is particularly disheartening because this is not the desired effect. The goal is to still have individuals be able to sell their assets when they can and change their portfolio and doing so without having to play some sort of tax game with the respect to their business and investment decisions.

Personal Residences and Capital Gains Rates

A personal residence is only taxable to the extent that the gain on the house exceeds $250,000 for a single individual or $500,000 for a married couple.

For example, if a person and their spouse bought a house for $400,000 ten years ago and are now selling it for $800,000, it is simply a $400,000 gain.

However, a married couple who sells a house that exceeds the $250,000 or $500,000 limits may have to face new capital gains taxation on some of the proceeds of the sale of their house. Individuals who find themselves in this situation have either typically held on to their house for a long time, so it has greatly appreciated in value, or they own upper-end houses that have continued to go up in value since the time of purchase.

Tips for Capital Gains as It Applies to Real Estate Transactions

When it comes to capital gains as it applies to real estate transactions, there are a few tips that individuals may find helpful, such as:

  1. A person considering selling this year or next, may want to sell this year to take better advantage of a market that certainly seems to be hot right now.
  2. Individuals who do not typically have incomes that would kick in the higher capital gains rates may be wise to do something such as sell their house on an installment basis where they can recognize the gains spread out over several years because it looks as though the higher capital gains rates will only kick in at high income levels, like $1 million. However, if somebody doesn’t typically make that much money but has a one-time house transaction that’s going through soon, they may want to spread that out over more than one year via a seller note.
  3. For a business or investment property, an individual that wants to sell a portion of commercial or business use property may want to take care of that this year and recognize that income. If they want to avoid the income or spread it out, an installment sale could be a possibility.
  4. If an individual with commercial or investment property is wanting to sell a piece of their property and purchase another one, they may choose to defer some of the gain via a 1031 or a Like-Kind Exchange but should be aware there are many regulations and rules surrounding this process.
  5. A person buying property that costs as least as much as the one they are selling may be able to defer the whole gain. Or it might be possible to recognize some of the gains to stay under the threshold for higher capital gains rates.
  6. As part of the 2017 Tax Cuts and Jobs Act dealing with opportunity zones, some individuals may be able to invest to defer their capital gain until the year 2026. It must be an investment in certain geographically qualified areas.

The key to knowing about capital gains as it applies to real estate transactions is to try to figure out what your income is going to be, what impact the capital gain may have on it, and then plan ahead using some of the tips and strategies mentioned above. For more information, please contact our Real Estate Lawyer today.

Ep 101: What Happens When a Business Owner Dies

Although it is not a welcome prospect, things to consider before a business owner dies are critical in the here and now. If you are a business owner who has not yet given thought to what will happen to the company you have worked so hard for, you risk losing everything for yourself as well as any potential beneficiaries. Estate planning is not just for individuals, it is essential for business owners as well. To protect all that you have built in assets, relationships, and more, it is advised for you to meet with an estate planning attorney as soon as possible so your legacy does not go unsecured.

What Happens to a Corporation When the Business Owner Dies?

In the unfortunate event that a business owner dies, one of the most frequently asked questions by personnel and relatives is, “What will happen to the business?” To a degree, this depends on how it is classified. For example, a corporation or limited liability company does not die, even if the owner does.

A corporation can live until it is either:

  1. Voluntarily terminated by filing papers with the state of the corporation
  2. Terminated by the state for issues with creditors, failure to file the proper forms, or failure to pay a state franchise tax

Aside from the above, a corporation should continue to exist even if the president or sole shareholder of the company dies.

Why Wills Are Important for Corporation Stocks

Corporations have stocks, and if the owner who owned all or even the majority of that stock dies, the stock then becomes an asset that is subject to probate. This means that the person’s will can determine who will get his or her corporation stocks in the event of their death.

In addition to having a will, some owners may choose to put corporate stock into a trust, as in some cases this can avoid probate and keep a business from ceasing to operate. If upon their death an owner wants to give stock to charity, that can be done through a will or a combination of a will and a trust. It is important to discuss this with your lawyers and accountants before taking action as sometimes there can be more advantage to making charitable contributions before death.

Giving advance thought to who will get the corporation stocks if a business owner dies is critical for both the individual’s and company’s wellbeing. Because life is unpredictable and we are not promised tomorrow, it requires both parties to be proactive now, regardless of the age or health of the owner.

The Importance of Securing a Successor Now

Business owners often have strong relationships with employees, customers, suppliers, and government agencies, and in the event that the owner passes, those relationships must be able to be maintained in their absence.

Many companies mistakenly do not consider that it could take some time for the business to recover from the death of an owner because that person may have acted as the primary agent in:

  • Bringing in business
  • Collecting monies owed
  • Fulfilling contracts

The result is that in some cases a business owner can be difficult to replace. At the very least it may require time and money to do so. For this reason, it can be beneficial to have insurance or enough cash stored away that this can be handled without waiting.

For some businesses such as sales, accounting, and such, the owner’s personal relationship with a client or customer base is critical to the company’s success. In situations like these, when an owner passes it is not uncommon for employees or staff to panic and try to grab the business, form their own business, or take the practices and relationships to a new employer who will reward them.

To keep the business from ending up this way after the owner’s death, it is important to make good use of covenants not to compete, as well as consider the following questions now, before it becomes an issue:

  • Who is going to take over the company?
  • Will it be a family member?
  • Will it be a current employee?
  • Will it be someone from the outside?
  • Is there anybody able to take over?
  • Is selling the business a better way to go?

Doctor’s offices, in particular, can struggle with this type of situation because of the nature of their practice. Over time a doctor typically builds up a practice that might have value to another doctor. If the owner/doctor passes, it is critical to move swiftly in getting an executor appointed to facilitate selling their book of business to another doctor before it is taken over.

This can be true of non-medical businesses too, as if there is no one in the family or business ready and willing to take over the role of owner, it is possible the business will end up being sold to an existing competitor or someone who wants to get into that business.

A corporation needs to make sure it is governed properly in the event of the owner’s passing. If there is not someone such as a Vice President who might be designated to automatically take over, there should be a shareholders meeting. If the shareholder is dead, a probate estate should be established, and an executor or administrator appointed. The appointed party would then act as the shareholder and be able to do tasks such as taking paperwork to the bank to show the corporation is now changing the authorized signer on the account.

Determining the Valuation of a Company

It can be complex to determine the valuation of a company because there are multiple concepts for doing so.

  • Sometimes a company will have value because it owns something such as process, machine, or brand name recognition. In these situations, the company has goodwill that has some value that the company will want to preserve.
  • In other cases, goodwill can be more personal if the founder or owner of the company’s relationships are key in getting people to come to them to do business. In other words, a person or entity is in relationship with the business specifically because of the owner, not the company, per se.

 

What to Do Now If Your Business’ Success Centers Around You as the Owner

While it can be quite the compliment to have business come to you because of your personal reputation and character as a business owner, it can also be responsible for the fast demise of your company after your passing or retirement.

A company earning millions of dollars annually because an owner has made a name for himself and established and maintained critical relationships will be in trouble when the owner dies and the people they had relationships with no longer feel obligated to work with their business.

This type of set up can make a business owner almost impossible to replace unless they take action now. Ensuring a balance between the relationships they have with the customers and other people within the company is key.

For a law or accounting firm, this may look like bringing in some of the younger company executives during the process of meeting and developing clients so that if a senior partner retires, dies, or decides they want to do something entirely different, the junior partners are able to then continue the owner’s legacy.

 

Prepare for Changes in Existing Business Relationships After an Owner Passes

Business owners typically have unique relationships with key players such as banks and suppliers, and it is common for these relationships to change after their passing. Some examples of this can be:

  • Bankers who may have felt quite comfortable in loaning a dollar a day and getting paid back the next
  • Suppliers who would willingly ship goods in August and not get paid until September

Without that relationship with the owner, banks and suppliers can be much less comfortable with the state of things, which can then negatively impact the company. If a bank has your operating account and capital line, it may freeze the account and use it to pay their note if they are feeling insecure. A supplier who may not have thought twice about shipping twenty thousand dollars of goods to the business each month may reconsider if they want to move forward in the same way.

No matter how healthy or young a business owner is, it is critical to anticipate the unthinkable so that the business and beneficiaries do not suffer. Key questions for an owner to consider now include:

  • Who are the shareholders?
  • Who are potential purchasers?
  • Who are competitors you might be willing to sell to?
  • Who will take over?
  • Who will have authority?
  • Functionally, who will be able to take over the business?
  • What is the business worth?
  • How will the customer base be maintained?
  • How will employee and supplier relationships be handled?
  • How will the value of the business be maintained in the event of disability or death of the owner?

Because life and business can change so rapidly, these questions should be evaluated on a near constant basis. Take action today to protect all that you’ve built for tomorrow.