Wednesday, October 8, 2014

Estate Planning: Having the Conversation


When I was first practicing law in the 1980's, the term "estate planning" conjured up visions of lawyers in expensive suits and large offices sitting down with the DuPonts and the Pews and figuring out ways to keep their fortunes intact through the next ten generations.  Estate planning meant avoiding taxes through intricate schemes and legal gymnastics that most of the people I knew didn't need.  Today, the federal estate tax only applies to estates over $5,340,000 [as of 2014].  Only the wealthiest 2% of the population needs to be concerned with planning for federal taxes.  But I have lived more life since then, I have seen loved ones become ill and pass away, and I have gone to their homes and sorted through their things, and discovered more about what estate planning really means.  It is about planning, about organizing, about confronting your own mortality, and most of all about having "the Conversation". 

People shy away from thinking and talking about the various events of life that can change their day to day routine so quickly:  about accidents, illness and disease, aging and death.  They are events that we cannot control, but they are events that we can plan for.  Having the conversation starts with talking to yourself:  what is your contingency plan if you are hospitalized, if you have a lingering illness, if you cannot make your wishes known to your doctors and loved ones.  Who do you want to make those decisions when you can’t?  The law in its infinite wisdom provides the method for all of the people who do not plan for these events.  If you cannot take care of yourself, the law permits a guardian to be appointed, in a process involving lawyers, a judge, hearings, time and expense.  If you have not made your wishes known through a living will, then the law provides the same process:  lawyers, a judge, hearings, perhaps Congressional hearings and political battles as well (remember Terri Schiavo?), all to determine what you might have decided if you had been competent to decide the issue of your own life and death, and if you had taken the time to let your loved ones know your wishes.  A little thoughtful planning, a discussion with your family a little expense, and you can provide for these situations, you can decide the issues that only you should really decide, you can document them, and then you have done all you can.  You have bought a relatively inexpensive form of insurance for the situation.  But most important, you have had the conversation, first with yourself, and then with your loved ones.  You have made a plan.

Estate planning today means having a durable financial power of attorney that designates one or more trusted loved ones to take charge of your financial affairs when you are unable to do so.  It means having a living will - also called a medical directive - that expresses what you would want done if you are in an end-stage medical condition, and selecting the person or people who you want making those decisions when you can't.  It means having a will that provides for your loved ones and appoints the person you want to handle your affairs.  It means considering making gifts while you can enjoy the giving; checking to make sure your insurance beneficiary designations are up to date; putting your records together in one safe place, writing notes to explain your affairs, list your various passwords, and even attending to your genealogy, and putting the names of the people on the back of the old family pictures.  It means telling your loved ones that you love them, writing them letters to be opened when you are gone, and showing them how much you love them by the thoughtful way in which you have prepared for that day.  By having the conversation, first with yourself, and then with your loved ones, and then putting an estate plan in place, you do not ward off the events of life, but you have done everything in your power to prepare for them.  So start today, in the morning over coffee or tea, and have the conversation.

©2014  Douglas P. Humes


Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice at the Millridge Manor House in Bryn Mawr, Pennsylvania.  Doug is also a Pennsylvania notary public and offers that service as an accommodation to clients and Millridge residents.  You can contact him at 610-525-7150, or via email at humeslaw@verizon.net).

Thursday, July 24, 2014

MURDER? SUICIDE? BUYER BEWARE!

There is a murder/suicide in a home.  The home is later put up for sale.  Must the seller disclose to potential buyers that the tragedy took place in the home? 
To answer that question, some background is in order.  In the beginning, there was caveat emptor – Buyer Beware!  While the saying is written in Latin, it apparently did not come down from Roman law – but made its first appearance in about 1534 in English law, a case on horse trading, when Fitzherbert set down in his Boke of Husbandrie: "If he be tame and have ben rydden upon, then caveat emptor."  
The seller owns the merchandise or property being sold.  He knows all of its secrets.  If you are considering buying it, then you need to do your homework, ask questions, protect yourself in the legal document.  If the seller represents that something is true, then put this promise into a binding legal agreement.  If you want to find out about the property, create a period of time, a “due diligence” period, when you are granted access to the property, ask for records, talk to neighbors, have your inspector out there inspecting things.  Because once you have bought property, then you own it, warts and all.  The roof leaks?  The basement is wet?  Termite damage?  Once you have bought the property, you have bought those issues as well.  (With some exceptions – if the Seller has lied, or hidden items from you, that can change the result). 
This was a good workable rule for feudal and early American society. 
But as government has become more protective of its citizenry, it has passed more and more consumer protection laws such as implied warranty and disclosure laws that seek to level the playing field a bit.  In 1996, the Pennsylvania legislature followed the majority of states in adopting a seller disclosure law for real estate.  The law requires the disclosure of certain specific items, with a required form, and also reaches further to cover “material defects”, which are defined as:
“A problem with the property or any portion of it that would have a significant adverse impact on the value of the residential real property or that involves an unreasonable risk to people on the land.”
The law, even in its infinite wisdom, cannot conceive of every which way that human interaction can produce chaotic results.  And so we have trial courts to sort it all out in the first place, and then appellate courts, to decide what cases fall within and without of the broad lines that the legislature uses to sketch out the laws. 
So in 2014, what happens if there is a murder/suicide in a home?  Must that be disclosed to potential buyers?  
The Pennsylvania Supreme Court just addressed that subject.  A husband had killed his wife and then himself in the home, and the crime was well publicized.  Buyer No. 1 bought the house from the Estate, put in several thousand dollars of renovations, and then put the property up for sale.  When you sell a property, you need to fill out and give a Seller Disclosure form.  Buyer No. 1 asked the realtor, and an attorney, did this murder have to be disclosed?  Both did their homework, and found that there was no law in Pennsylvania on the subject.  The Seller did not disclose the murder.  Buyer No. 2, an out of state buyer, bought the property.  When she found out about the murder from her new neighbors, she sued the seller and the real estate agents. 
Disclosure of murder is not specifically covered by the Seller Disclosure law.  But it could conceivably be covered by the catchall provision if a court found that a murder was a “ … problem with the property or any portion of it that would have a significant adverse impact on the value of the residential real property …” 
In a thoughtful opinion, the court explored this issue and the larger issue - whether “psychological stigmas” are material defects in a property.  If a murder had to be disclosed, then the court asked “How would one treat other violent crimes such as rape, assault, home invasion, or child abuse? What if the killings were elsewhere, but the sadistic serial killer lived there? What if satanic rituals were performed in the house?” 
Requiring a seller to find out and disclose the entire realm of events that occurred in, or were associated with, the property, and that some people might find objectionable, would be too great a task for sellers.  The court concluded that “(t)he occurrence of a tragic event inside a house does not affect the quality of the real estate, which is what seller disclosure duties are intended to address.”  The unanimous court held that “… purely psychological stigmas are not material defects of property that sellers must disclose to buyers.”  
So now you know.  Buyer Beware! 

Thursday, May 8, 2014

For Sale by Owner (FSBO): Is this for you?

Combine a down economy and a slow real estate market, and some people who are ready to sell their home start thinking about saving money by doing it by themselves.  There are situations where that may be effective; and then there are situations where you may simply be wasting your time and simply delaying the inevitable call to a realtor.  What situations lend themselves to a "for sale by owner" (or FSBO) approach? 

A good full service realtor can provide you with a range of services.  They can come in and evaluate your home, give helpful suggestions on why a complete cleaning and a new coat of white paint may increase your value, give suggestions on cleaning, repairing and reducing clutter to make the home more attractive for sale.  When your home is ready for sale, they suggest an initial listing price and then list the home with the multiple listing service, and so your home is then "on the market" to the real estate community and their clients.  A realtor will provide additional marketing - brochures, open houses, working their contacts - to get traffic through your home.  They will provide you with the various forms that you need to fill out - the seller's disclosure, lead paint disclosure, and forms of agreements of sale and inspection addenda.  They will negotiate with the prospective buyer's agent.  They may pre-qualify prospective buyers so that they only bring qualified candidates to view your home.  When an agreement of sale is signed, they will put the buyer in touch with a title insurance company and a mortgage lender.  They will troubleshoot any inspection, title and mortgage issues.  They will help arrange for a settlement and help guide you through settlement.  And they only get paid at the end - at the successful closing - where the seller's agent and the buyer's agent will split what is typically a 6% commission.  If you sell your home for $400,000, then the commission that typically is paid in full from the seller's share of the proceeds, is $24,000.  The realtors in theory all work for the Seller, and so it is the Seller that bears the full responsibility to pay the commission. 

When you are embarking on a FSBO, you need to anticipate and provide for these types of tasks and services.  If you have a ready willing and able buyer lined up - if your child or grandchild wants to buy your house, or Cousin Sophie's boy, or the friend of a next door neighbor, and if you have agreed on a price, then you really don't need the marketing services that the realtor provides.  You simply need someone to help you through the various stops that get you from a handshake through an agreement, and then closing.  You can get those services for far less than the full 6% commission would cost you.  A lawyer will provide the documents and advice that you need at hourly rates.  The title company is a wonderful resource - once they are involved, they take care of the title search, and gather all the documentation needed to clear title for closing.  They typically draft the deed as well, and will run the closing and prepare the settlement sheet that allocates the various costs and expenses.  The mortgage lender does all of the document preparation for the transaction, and will in some cases send a representative to the closing to explain the various documents.  If you remember from closings that you have attended, the buyer must go through the stack of documents and sign them all; the seller simply sits there and waits for the money to change hands.  If you have good professionals involved, then the realtor's primary contribution to the transaction is the preparation and marketing.  Once an agreement is signed, the other professionals carry it to closing.  The buyer pays for title insurance.  The buyer pays for the mortgage and the loan documents.  In a sale transaction, once the fish is in the boat, the seller only needs to pay his or her attorney for the transaction costs.  You don't need the full services that a realtor can provide, at the full commission.

If you do not have a ready, willing and able buyer, then you need marketing.  You may try word of mouth or distributing home made brochures in your neighborhood, putting ads in newspapers, holding your own open houses, but a FSBO will not be as likely to attract traffic as a realtor's listing.  You are not in the multiple listing service used by all realtors.  The realtors will not bring their clients to your home - you are not offering to pay them and so it is not in their interests to steer their clients in your direction.  You may have the most wonderful house in the world at a bargain price, but you need to make that fact known to as many people as possible - and it is difficult to do without a realtor.  In a red-hot market or neighborhood, you may find that word of mouth will sell your house.  While it is nice to have the information on your listing in the hands of hundreds of realtors and thousands of prospective buyers, you really only need one buyer, and when you have the luxury of a seller's market, you may be able to find a buyer without a massive marketing campaign. 

The most recent entry into this field is of course online marketing and selling.  There are now online services that will assist a seller in marketing their property, and reaching the online audience in addition to whatever audience you reach with your own marketing efforts.  Time will tell whether these online services will completely replace the network of realtors as we know it today.  The realtors had a monopoly of sorts on the multiple listing service - it was their creation - to make listings available to the whole community of realtors.  But as with so many other areas of life, the internet can bypass the middleman and make the information directly available to the consumer who is looking for the information - complete with photos, or video tours, background information on taxes and insurance and the neighborhood and schools.   

As more and more people get used to buying online, more and more middlemen are cut out of the process.  We may gain in efficiency and cost, but we continue to lose the personal contact that came with having people from the community, such as the local banker and realtor, involved in the process.  That's the tradeoff that you face when you go FSBO:  you may save money under the right circumstances, but you do not have the realtor to call with questions and concerns.  But of course other professionals are available.  Including your friendly neighborhood attorney!

©2014  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice at the Millridge Manor House in Bryn Mawr, Pennsylvania.  Doug is also a Pennsylvania notary public and offers that service as an accommodation to clients and Millridge residents.  You can contact him at Suite 210,  Tel: 610-525-7150, or via email at humeslaw@verizon.net).


Friday, April 18, 2014

Taxes: better late than never

April 15th has come and gone.  Most of us feel relief that the chore of filing the return and paying income taxes is done.  For some, the pleasure is fleeting - as they have simply filed for an extension, and so postponed the problem until August 15th.  And for others, those with taxable income who have not filed their return and do not plan to, somewhere in their future lurks the penalties for failure to file a return, and the failure to pay the tax that is due.  

Which one is worse?  Failure to file.  

The IRS can understand the failure to pay - if you don't have the money, then they will work with you.  But they take a more dim view of the failure to file.  Our system is one of voluntary compliance.  Everyone is counted on to pull on their oar.  And if you are not pulling on your oar, it means more work for the rest of us.

If you file late, you will need to pay 5 percent of the unpaid taxes for each month or part of a month that a tax return is late, plus a failure-to-pay penalty of 1/​2 of 1 percent of your unpaid taxes.  And if you never voluntarily file or pay, and they must find you, then you will face civil fraud penalties, a criminal misdemeanor charge, or even a felony charge for tax evasion.  So, the lesson is that it is better to file, on time, and then work with the IRS on a payment schedule if you can’t pay what you owe on time.  And with that introduction, here are tips from the IRS on how they will work with you on those issues.  

Tips for Taxpayers Who Missed the Tax Deadline

If you missed the April 15 tax filing deadline, don’t panic. Here’s some advice from the IRS.

• File as soon as you can.  If you owe taxes, you should file and pay as soon as you can. This will help minimize the interest and penalty charges. There is no penalty for filing a late return if you are due a refund.

• IRS Free File is your best option.  Everyone can use IRS Free File to e-file their federal taxes for free. If your income was $58,000 or less, you can use free brand-name software. If you made more than $58,000 and are comfortable preparing your own tax return, use Free File Fillable Forms to e-file. This program uses the electronic versions of paper IRS forms. IRS Free File is available through Oct. 15 only through IRS.gov. 

• IRS E-file is still available.  IRS e-file is available through Oct. 15. E-file is the easiest, safest and most accurate way to file your taxes. With e-file you receive confirmation that the IRS received your tax return. If you e-file and choose direct deposit of your refund, you’ll normally get it within 21 days.

• Pay as much as you can.  If you owe tax but can’t pay it all at once, try to pay as much as you can when you file your tax return. Pay the remaining balance as soon as possible to stop further penalties and interest.

• Make a payment agreement online.  If you need more time to pay your taxes, you can apply for a payment plan with the IRS. The easiest way to apply is to use the IRS Online Payment Agreement tool. You can also mail Form 9465, Installment Agreement Request. The tool and form are both available on IRS.gov.

• A refund may be waiting.  If you’re due a refund, you should file as soon as possible to get it. Even if you are not required to file, you may still get a refund. This could apply if you had taxes withheld from your wages or you qualify for certain tax credits. If you don’t file your return within three years, you could forfeit your right to the refund.

For more information, visit IRS.gov.

Additional IRS Resources:
IRS YouTube Videos:
IRS Podcasts:

Wednesday, March 12, 2014

My Lender Forgave My Mortgage Debt. Now what?

You have a home mortgage, and were unlucky enough to buy high.  In the real estate crash, your home value sunk below the mortgage amount.  You were "underwater".  You could not sell the home because you would have had to come to the closing table with a large amount necessary to pay off the mortgage.  This is the situation when a "short sale" is used.  The lender agrees to accept less for its loan than what you owe, in order to cut its losses and get something out of the property.  So you sell the property.  You walk away.  The lender agrees not to chase you for the balance that you owe on the mortgage loan.  Are you done?  

Not quite.  Under federal tax law, when your creditor forgives a debt that you owe to him, the government considers that forgiveness as income to you, and you are taxed on it.  If today you owe someone $100,000 for a mortgage loan; and tomorrow that lender agrees that you don't have to pay it, then you are $100,000 richer.  And the government wants its cut.  

But the economic crisis that we have been through has given birth to legislation that changes that rule if the debt that is forgiven is home mortgage debt.  Here's the explanation for what you need to do to benefit, straight from the horse's mouth - IRS Tax Tip 2014-31:

Special Exclusion for Cancelled Home Mortgage Debt

If a lender cancels or forgives money you owe, you usually have to pay tax on that amount. But when it comes to your home, an important exception to this rule may apply in 2013. Here are several key facts from the IRS about the special exclusion for cancelled home mortgage debt:

• If the cancelled debt was a mortgage loan on your main home, you may be able to exclude the cancelled amount from your income. To qualify you must have used the loan to buy, build or substantially improve your main home. The loan must also be secured by your main home.

• If your lender cancelled part of your mortgage through a loan modification, or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program. Visit IRS.gov for more details about HAMP. The exclusion may also apply to the amount of debt cancelled in a foreclosure.

• The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or greatly improve your main home. Proceeds used for other purposes don’t qualify. For example, a loan that you used to pay your credit card debt doesn’t qualify.

• Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit card debt or car loans.

• If your lender reduced or cancelled at least $600 of your mortgage debt, you should receive Form 1099-C, Cancellation of Debt, in January of the following year. This form shows the amount of cancelled debt and other information. Notify your lender if any information on the form is wrong.

• Report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the completed form with your federal tax return.

• Use IRS e-file to file your tax return. E-file is the easiest way to file because the software will do the hard work for you. You can use IRS Free File to prepare and e-file your tax return with either free, brand-name software or online fillable forms – all for free. Otherwise, you may file electronically with commercial software, or through a paid preparer.

• Whether you use IRS e-File or mail a paper return, you can use the Interactive Tax Assistant on IRS.gov to find out if you must pay tax on cancelled mortgage debt.  

For more on this topic, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. You can get IRS forms and publications online at IRS.gov or by calling 800-TAX-FORM (800-829-3676).


Additional IRS Resources:

Tuesday, March 4, 2014

Unemployment Benefits and Taxes

We are in a winter (2013-14) that threatens never to end, and in an economic recession where the employment numbers improve only because people stop looking for jobs.  When will it end?  

And on top of that, if you are still receiving Unemployment Benefits, we are coming around to April 15th, and those benefits are taxable!  Here are some Tax Tips from the IRS on what you need to know about paying taxes on UE benefits, together with helpful links.

Five Facts about 
Unemployment Benefits

If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.
Here are five important facts from the IRS about unemployment compensation:

1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.

2. There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. For more about the various types, see Publication 525, Taxable and Nontaxable Income.

3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.

4. You can choose to have federal income tax withheld from your unemployment. You make this choice using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.

5. If you are facing financial difficulties, you should visit IRS.gov. “What Ifs” for Struggling Taxpayers explains the tax effect of events such as the loss of a job. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.

For more details, see IRS Publications 17, Your Federal Income Tax, or IRS Publication 525. You can download these booklets and Form W-4V at IRS.gov. You may also order them by calling 800-TAX-FORM (800-829-3676).


Additional IRS References:

So, get your tax returns filed, keep up on your shoveling, keep driving carefully, and hopefully we will see some sunshine on both ongoing issues in 2014.