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Estate Planning for Real Estate Investors

Estate planning for real estate investors involves distributing your assets after death to such people or causes according to your wish with minimum legal complications and the least tax incidence. And estate planning is not just for the wealthy; nor is it something to be contemplated when you reach the ripe old age of eighty.

Anybody, irrespective of age, with considerable assets and the desire to provide for dear ones even after death would be doing a great service by planning one’s estate. And the best time to plan your estate is now when you are still alive and have the requisite mental health to make rational decisions. An estate plan made during an illness affecting contracting capacity can be challenged, complicating matters for beneficiaries. Remember, death or a debilitating illness affecting your legal capacity to contract might strike you any day; therefore, you should prepare for that eventuality beforehand. øda

The first step in planning your estate is to take stock of all your material possessions (technically referred to as “estate”), and then determine their value. Typical items comprising the estate include: house(s) and land; motorcycles, cars, planes and boats; cash-in-hand; savings accounts, pension accounts; certificates of deposits; stocks, bonds, and mutual funds; insurance and annuities; employee benefits; jewelry, furniture, art collections; ownership rights/interests in businesses; and claims against others. Mind you, the list is not exhaustive and your debts and obligations to others are also a part of your estate.

Next, line up the details of your beneficiaries’ names, addresses, and ages. In addition, you should determine who should be the trustees/guardians in case the beneficiaries are minors at the time of planning the estate. Also, you must identify a personal representative of the estate. It would be easy if you line up pre and post-nuptial agreements, divorce decrees, previous wills, deeds of real estate property, and latest tax returns before you consult a professional estate planner.

Though small estates might be easy to plan, it is advisable to take the help of professional estate planners, including attorneys and CPAs, to explore all the possibilities to reduce tax incidence.  This is particularly true if you own one or more business entities or businesses, rental properties, and/or assets in multiple states.

Will vs. Living Trust

A will or “Last Will and Testament” is a document that lays out who’s in charge of your estate, who’s the guardian of your minor children and who gets what from your estate.  A will must be “probated”, which is a legal process in court that can be expensive and time-consuming, depending on which state you die in.  And, if you own assets in multiple states, you may have to open probate proceedings in those states as well.

A living trust is a document that appoints a trustee to handle your affairs when you (and your spouse) are gone.  Assets can be held in trust for prolonged periods of time if a beneficiary is a minor at the time of your death. Also, a trustee may have the discretion to distribute or not distribute assets based on the needs and particular situation your heirs are in.  For example, many of my clients request the trust have a provision that if an heir is a habitual drug user or in jail for a felony, the trustee will not give that heir any money.  There are endless options you can place in a trust, and I haven’t told you the best part… a living trust avoids the probate process.  This only works, however, if all of your assets are titled in the trust.  Many clients forgot that step and end up in probate court anyway.

How to Hold Assets in a Living Trust

Many attorneys who do estate planning will advise the client to re-title all of their rental properties in the trust.  While this avoids probate, it does not offer any assets protection for the other assets in the trust.  Instead

, it makes more sense to own real estate and other assets in various entities (LLC, for example), and then have the ownership of the entities in the trust. This will give you both asset protection AND probate avoidance.

Remember, estate planning for real estate investors is not a one-time affair. Any change in your marital status, death of beneficiaries, a birth of a child, or changes in the law may require a review of the plan.  In short, if you have no estate plan or your plan is over 10 years old, it may be time to visit with an estate planning attorney.

Filing Requirements for a Contract for Deed in Colorado

My new website, “Coloradolandcontract.com” explains the ins and out of selling a property by contract for deed, also know as “Installment Land Contract” in the state of Colorado.

A contract for deed is the sale of a property for all intents and purposes, but the title (deed) remains in the seller’s name until the balance of the contract is paid off.  The buyer has possession of the property and pays the seller principal and interest, plus pays for taxes and insurance on the home.  This is very similar to a mortgage, except that the buyer does not have the deed in his name until he pays off the balance of the contract by refinancing or selling the property.

Colorado has had some problems in the past with sellers collecting taxes from the buyers and not paying them to the county.  This will ultimately result in the property being losto the county or some tax lien buyer for a nominal amount of back taxes.  So, the Colorado legislature attempted to remedy this by requiring three things on a contract for deed sale:

1. The contract must name the public trustee of the county where the property is located to be the escrow agent to collect taxes and pay them to the county treasurer each year.

2. The seller must file a “notice of transfer” form with the county treasurer, which alerts them that the county public trustee will be paying the taxes to them.

3. The seller must file a real property transfer declaration with the county assessor (standard form required for all property sales).

See, CRS 25-25-126.

Sounds good in theory, but what about in reality?  The reality is a NIGHTMARE!

First, most county officials don’t know the law exists and don’t know what to do when they are contacted to set up the escrow.  Second, even if they know what to do, the legislature didn’t address the most common contract for deed, which is a wrap of an underlying loan that ALREADY HAS A TAX ESCROW WITH THE LENDER!  If the public trustee thus collected taxes from the buyer, it would be double payment.

So how do we deal with this?  Simple, we comply with the law, then promptly ignore it.  We file the notices, we name the public trustee as literally required by the statute, but then the buyer pays the seller monthly taxes and the seller pays it to his underlying lender, who then pays it to the county each year.  The statute has a penalty for not filing the notices, but there’s no penalty for the buyer not paying the trustee (in fact, the law puts the burden on the BUYER to set this up, not the seller).

The penalty, however, for NOT filing the forms is brutal.  The buyer has 7 years to cancel the contract and get ALL of his payments made under the contract back. I had the read the statute twice to believe it!  But, having been to court on this issue more than once with a client who didn’t know about the filing requirement and did a closing on his own, let me share with you the REALITY of this law.  In every case this actually happened, the Judge said, “You can cancel the contract, Mr. Buyer, but you don’t get to live there for free – I am going to let the seller counter claim for the reasonable rental value of the property for the time you’ve stayed there”.  In every case, it was a wash – the buyer got his money back, but the Judge ordered the same money to be paid to the seller as rent for the time the buyer lived in the property.  Thus, in reality, the draconian statute really has no big penalty in practice.

We’ve be doing it this way for 15 years – literally complying with the requirements of the statute and then ignoring it – and so far no problems.

If you’d like to do a land contract closing in Colorado, contact us at 303-398-7032.

 

Hidden Fees for Online Corporate Filing Services

I formed a company in Indiana last year using a big name corporate filing service.

I just got the annual billing for registered agent service – $225!!!

A registered agent is someone in the state of formation with a physical address that can be served in a lawsuit against the company.  If you live in the state of formation, it can be you, and you don’t need to pay a registered agent.  If you don’t have an office address and would prefer keeping your home address private, then a registered agent service like www.registeredagents.com charges $59/year.

The lesson is, watch what recurring billing you are agreeing to when you sign up for a “cheap” incorporation service online.