Difficult Year-End Tax Decisions for 2012

Posted on December 6, 2012 by George

I again take this opportunity to send holiday greetings and to offer estate planning information. These days everyone is discussing the “fiscal cliff” and the apparent inability of the U.S. Congress to prevent a wholesale slew of budget cuts and tax increases that some experts say could jolt the economy into another recession. In Congressional history, very few logjams have actually created the disaster feared. Congress has almost always found a way to reach a compromise, however uninspiring, which saves us from potential economic disaster.
Some of the concern surrounds the Federal Estate Tax and its scheduled reversion to a $1 million taxable threshold on January 1, 2013, if Congress fails to act. Many estate planners believe, me included, that Congress will save us from a jarring increase in the Federal Estate Tax. Even the President’s plan recommends no less than a $3.5 million taxable threshold. His willingness to negotiate the threshold is seen in the last major estate tax legislation on December 17, 2010, when the threshold rose from $3.5 million to $5 million. The Federal estate tax simply does not produce that much revenue, having been gutted by more than thirty years of successive changes which weakened its tax bite. It is possible that Congress may wait beyond the January 1, 2013 date to enact new changes, if only so that the new Congress can boast to its constituents that they have been effective in “lowering taxes” (a boast made possible solely by their inaction in 2012). Since any Federal Estate tax return would be due only as of nine (9) months following the date of death, it is entirely possible that Congress could wait as long as until August 31, 2013 to make any final changes to this!
Apart from possible tax increases arising out of the eventual resolution of the “fiscal cliff”, taxpayers earning more than $200,000 (i.e. adjusted gross income –“MAGI”), and married couples filing jointly with more than $250,000 will be subject to the Obama Care surtax, effective as of 2013. The 3.8 percent tax applies investment income (dividends and capital gains), but only to the extent it would exceed the $200,000 ($250,000) MAGI level.
Conventional end-of-year tax wisdom has always been to offset any gains by selling investments that would produce a capital loss. This way, net gains are reduced, and capital gains taxes would be lower. Second, consider gifting investments that gone up in value to charity, including your religious congregation, if you have one. You get a deduction for the full amount of the stock, even though you have never “cashed-in” by selling the stock first.
But do the Obama Care surtax and the possibility of “fiscal cliff” tax increases turn that strategy on its head? In other words, might it be better to “save” your tax-savings strategies for use in 2013, when tax rates will be higher and there will be a surtax to contend with (if you earn over the threshold)? If you are a pessimist and “save” your strategies for 2013, you may wish you hadn’t, if Congress sets a higher rate threshold at a point lower than what you will make in 2013. I regret to say my crystal ball does not say which way the tax winds will blow.

My law practice continues to grow in the areas of estate administration and settlement, estate planning, taxation, and estate litigation. I also represent clients in all types of real estate transactions, mortgage financing and contract matters, as well as criminal, personal injury, and business litigation. My 5 Militia Drive office in Lexington is a bright, 1st floor location with plenty of free parking. Please visit my firm’s web site at http://www.georgefootepc.com; you will find useful information there, such as my “Estate Information Check List” which I recommend all clients use to inventory their investments to get a better picture of what their estate is worth. You can also contact me at georgefoote@rcn.com. This is one of the few “advertisements” I use, as I rely primarily upon recommendations from clients. Thank you for the referrals you have provided in 2012 and I wish you good health, good times, and peace in 2013.

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January 2, 2012 the new Massachusetts Uniform Probate Code (MUPC) takes effect

Posted on December 16, 2011 by George

Season’s Greetings from the Law Office of George E. Foote, P.C.

I again take this opportunity to send holiday greetings and to offer estate planning information. Most estate planners adhere to the prevailing wisdom that it is generally a good idea to “avoid probate”, and trusts are often the tool utilized to accomplish this goal. Despite this advice, this goal cannot always be accomplished. Assets are often forgotten or omitted from trusts and left in a person’s sole name. Clients with modest estates often hold their property in joint names because the survivor receives full control of joint property when the first joint owner dies. But jointly held property is subject to probate upon the death of the last joint owner. Heavy reliance upon joint ownership for an estate plan will thus make it more likely that probating an estate through the Probate & Family Court will be required.

January 2, 2012 will usher in significant changes in the procedures required to probate an estate in Massachusetts. This is the date the new Massachusetts Uniform Probate Code (MUPC) takes effect. The new system notably makes it easier to close an estate. Thus, a formal “Final Account” is required to exempt the executor from future liability. Under current law, without a “Final Account”, an executor is vulnerable to allegations from heirs that his/her estate obligations have been handled improperly or are incomplete. Under the MUPC, an estate can now be closed “informally”, which does not require a detailed specification of all assets, income and expenses. Sometimes requiring an executor to provide such detail might be a good idea, but with many estates, families are in complete cooperation and there is no controversy. For these estates, the option to close an estate informally will be welcome.

Of course, even though many of these new rules are designed to streamline the probate process, some experts are already disagreeing how the new rules will be applied. In addition, estates commenced under the old system, if not closed prior to June 30, 2012, must be re-filed in some fashion using the new MUPC forms. The resulting confusion, at least during the first several years of the new MUPC should cause clients to at least consider holding all their property in Trust, if only to avoid this confusion. Creating a trust was once thought of a process only sought by “rich people”. In the 21st century, however, even people of modest means would benefit from using a trust as the foundation of their estate plan. For example, whether under the new MUPC system or the former system, having a will, but no trust, requires probating an estate. This makes a client’s private assets public. Holding a whole estate in trust can ensure that a family’s net worth will be kept private and not put on public display. In addition to being open to public inspection, the probate process requires formal notice to all next of kin, whether or not they are named beneficiaries under a Will. When an excluded heir is notified about the probate of an estate, a forum is provided to relatives to air their grievances. A democratic society, of course, benefits from such “sunshine”. On the other hand, disgruntled heirs do not always have something productive or helpful to say, and the probate system, whether under existing law or new MUPC, can be manipulated to frustrate the wishes of the decedent.

Creating a trust, drafted with thoughtful statements concerning a decedent’s intentions, can address anticipated objections of obstreperous heirs, but not require a legal forum where the administration of an estate can be brought to a gridlock. Legal remedies always exist to prevent abuses, but the forum is not automatic, as it is when a Will is submitted to probate. Avoiding probate by using a trust is a preferable option.

My law practice continues to grow in the areas of estate administration and settlement, estate planning, taxation, and estate litigation. I also represent clients in all types of real estate transactions, mortgage financing and contract matters, as well as criminal, personal injury, and business litigation. My 5 Militia Drive office in Lexington is a bright, 1st floor location with plenty of free parking. Please visit my firm’s web site at http://www.georgefootepc.com; you can also contact me at georgefoote@rcn.com. This is one of the few “advertisements” I use, as I rely primarily upon recommendations from clients. Thank you for the referrals you have provided in 2011 and I wish you good health, good times, and peace in 2012.
—— George E. Foote, J.D., L.L.M. in Taxation

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Meet Guest Blogger, Don Lovering, Licensed Home Inspector

Posted on October 5, 2011 by George

I am pleased this week to host a guest blogger at my Law Information blog. Don Lovering is a licensed building inspector in Massachusetts, is a past president of ASHI, the American Society of Home Inspectors, and is also currently an adjunct professor at Salem State College in Massachusetts. Don and I have worked together in many real estate transactions, where he has performed inspections of homes my clients have contracted to purchase, and almost always has saved them a lot of money and aggravation. I hope you all find Don’s article interesting and helpful:
Have a wet basement?
Consider the recently published story of homeowner Lee Johndrow, a NH clergyman. About 3 years ago, he and his wife decided to update their home to accommodate visits by their children and grandchildren. During the course of the work, the general contractor made a significant error causing the home to flood. For three months, Lee and his wife pumped water out of the basement of their house. It was a seemingly never ending replenished supply of outside water seepage. They lost furniture, photographs and other memorabilia. Their final indignation was a now never ending supply of mold growing in what has become a skeleton of what was once their home.
Lawyers were employed and 3 insurance companies were summoned. Finally, the Johndrows moved to an outdated RV attempting to “get on with life”. They do not have the company of their children or grandchildren in their home as was their original plan. When this winter arrives, they will be once again looking for heated shelter from the elements.
So what went wrong? The contractor apparently lacked the experience to complete the work in a workmanlike manner. The Johndrows never employed an independent inspector to protect their interests.
Whoa! You say. We pay Town Building Inspectors to do that work, don’t we? Unfortunately, capping a growing trend which has been underway for many years, almost every town building inspector I have met is grossly overworked and underpaid. Even in the smallest of communities, a range of between 60 and 100 permits are open on a daily basis. Two municipal inspectors working at lightning speed could not effectively review 60 projects requiring at least 5 visits before the project is complete plus do all the paperwork, answer the phone inquiries, as well as attend building committee meetings.
This makes hiring an independent home inspector almost a necessity when undertaking a home building project. Budgeting for the cost of your own inspector, as well as an attorney to review and were advisable, to negotiate terms of your construction could save you possibly thousands of dollars, and years of grief.
Here are just a few examples of my experiences where hiring a private building inspector earlier might have saved my clients money and aggravation:

o Mrs.”Smith” had the electrician over to repair the dimming lights 4 times and paid out $3700.00 in repairs. The problem was the power transformer at the street, the utility company replaced it and the flickering lights went away. Come to think of it, the electrician did the same. The test was a simple one which I had performed and had it been done early on Mr. and Mrs. ”Smith” would have been $3700.00 richer.

o Mr. and Mrs. “Jones”, both young busy professionals, needed their deck “spruced up” for company. They hired a pressure washing contractor who started the work while the “Jones” were both at work. He called them at work and said that there was “a lot of rot” and that the “deck was unsafe”. The contractor told them he could replace the rotted wood starting today, “if they wanted”. Mr. “Jones” said “fine; just get it done”. While having lunch Mr. “Jones” called Mrs. “Jones” to relate the deck developments. Mrs. “Jones” reminded him that their deck had replaced 5 years ago, and why was it rotted? I got a call from them both asking if I could stop buy early the next day to have a look. I looked at the entire deck, top bottom in and out. I discovered that only a piece of trim had been replaced by the pressure washing contractor. I noticed that one board was rotted. As I was leaving, the contractor arrived and asked who was I? I said, “Just a friend”. He eyed me suspiciously. Coincidentally, because he called Mr. “Jones” at work asked for his credit card number to pay an invoice of $1756.00 for deck repairs. The deck “repair” invoice was not paid and the contractor is most likely still looking over his shoulder every day for Mr. “Jones”.

o Mrs. “Emery” wanted to move closer to her family. Her daughter had moved to North Carolina with the 3 grandchildren and Mrs. “Emery” was lonely, since her husband had passed on. Mrs. “Emery” was meticulous about her house and its upkeep. While gardening, she saw 3 loose bricks on the chimney. She asked her handyman to fix them and he said he was just too busy. Mrs. Emery found a mason on a well known listing service for contractors. The mason came out chatted with her about her flowers and her garden. He told her the repair would require a masonry building permit which was quite expensive. He also claimed that the chimney was “unsafe” and she could risk her life by turning on the heat. Mrs. “Emery” hired him on the spot. But the mason never did get any masonry permit yet still charged her $5000.00, cashed her check and disappeared. I saw the mason’s final work product. Perhaps if it was a hot day. It took him 1 hour to repair the 3 loose bricks. When the gentleman is tracked down, I will give my testimony on the time and skill level required to perform the repair.

The moral of the story, as I see it, is clear: a private building inspector is a valuable and worthwhile asset to have on your side. The cost involved is likely much less than you would think, and much less than the disasters that can be prevented. I hope I can be of assistance to George’s clients and potential clients in the future. Those interested should feel free to contact me at 617-928-1942 or at lovering@earthlink.net

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Living in a Two-Unit Condominium

Posted on August 9, 2011 by George

I frequently represent clients seeking to purchase a condominium composed of only two units. Often this is a conversion of a building that was formerly a two family house. Communities such as Arlington, Medford, Watertown and Waltham have a large stock of two family homes and many of them have been converted to condominiums. Is living in a unit in one of these condominiums a wise choice?
The Massachusetts Supreme Judicial Court (SJC) has made the following observation in Lallo v. Szabo,
75 Mass. App.Ct. 1 (2009):
Condominium ownership is generally characterized by the relinquishment of some “personal choice” in exchange for the benefits that may be derived from associating with other property owners. Franklin v. Spadafora, 388 Mass. 764, 769 (1983). A person’s ownership of a condominium unit includes an exclusive fee interest in the individual unit, but is subject to limitations set forth in the master deed and the condominium by-laws. G.L. c. 183A, § 4. … It is therefore a hybrid interest in real estate, entitling the owner to both exclusive possession of his unit and an undivided interest as tenant in common with other unit owners in the common areas. Noble v. Murphy, 34 Mass. App.Ct. 452, 455-456 (1993).
The SJC’s point about the ownership being “a hybrid interest in real estate” cannot be over emphasized. Unlike a person’s single family home, there will likely be some kind restriction on renting one’s condo unit to third persons. Some condominiums provide a “right of first refusal”, which interposes a “speed bump” on sales of a unit to third parties. Such a provision mandates that a unit must first be offered to the other unit owner, on the same terms of a proposed sale, before any transfer may take place. If the other unit owner “waives” this right, the sale to the 3rd party may proceed. Most condos do not have this provision because of the delay and occasional logistical problems involved. People who are hyper-concerned about who will be living next to them might tend to want such a provision, but any restriction upon free transferability of a unit will have a negative effect upon the value of a property. The more restrictions upon use or transfer of a condominium unit, the more that property’s potential future value will be likewise restricted.
A condominium is broken into two basic categories: those portions of the property that a classified as part of a unit and everything else is classified as a “common area”. No single unit owner has unfettered rights over common areas. Areas such as roofs, main plumbing lines, hallways (i.e. not those wholly inside one unit), patios, sidewalks, yards and gardens are most often classified as common areas. There can be a further breakdown of common areas into those which both owners have equal rights to utilize, and those areas which are classified as “exclusive use” areas. Exclusive use common areas are those which only one unit owner has the right to utilize. Having said that, the right of “exclusive use” is not the same as the right to exclusively change, or modify, even if done at that particular unit owner’s exclusive expense. This means that a unit owner may not have the right set out flower pots on an exclusive use deck, to plant a particular garden in their own exclusive use yard area, or to hoist a decorative flag or banner on their own exclusive use porch, without first obtaining the other unit owner’s consent. Another problem, not immediately apparent to a potential buyer is that all common areas must be maintained at the expense of the whole condominium (i.e. both unit owners). This is a topic that could be the subject for a whole separate blog.
While the key to enjoyable living is always being on good terms with one’s neighbors, one cannot always guarantee that one’s neighbor will be reasonable. There is always some kind of risk tying oneself closer to an unknown quantity, but most people appreciate if an extra effort is being extended. The last resort for disputes is arbitration. It is vital that all two unit condominium documents contain an arbitration provision. The right to arbitration does not, of course, guarantee that a unit owner can compel agreement if the condominium documents are clear about the particular right or responsibility. In Lallo v. Szabo, 75 Mass .App.Ct. 1 (2009), the SJC denied forcing one unit owner into arbitration because the proposed modifications sought by the Plaintiff (installing dormers and a roof deck) required the use of the roof, which was common area space, for the sole benefit of the plaintiffs. The modifications would have taken sections of the roof and essentially allocated them to the plaintiffs. The Court also stated that dramatically expanding the living area of the unit by (in part) incorporating portions of the common areas would alter the relative values of the units and therefore this would alter the respective shares of the common area. Other issues to be considered, the questions of who pays for the arbitration? Who pays for the attorneys? Who pays for the aspirin needed after reading and understanding all the condominium documents and the potential issues which exist with a two unit condo? Just kidding, of course. Understanding what you are getting into is half the battle, and condominiums can make living in a home that is very similar to a single family house quite affordable. My office is always available if questions on such a transaction arise.

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To Inspect or not to Inspect: Is that a Question for New Construction?

Posted on July 15, 2011 by George

Clients often ask me, “Should I hire an inspector if I am buying a newly constructed home?” In Lexington, Bedford, Lincoln and Concord, where the cost of newly built homes routinely exceeds $1 million, some buyers feel that they can rely upon the fact that the Town building department will perform inspections for their benefit, as a condition of issuing a certificate of occupancy. This, they reason, makes a private building inspection unnecessary.
But newspapers tell us almost weekly that almost all State and local governments have suffered massive staffing cuts. There is as a result, pressure on all these governmental units to manage the same or sometimes increased workloads with level or fewer number of employees. This includes city and town building departments. While building departments do an admirable job in enforcing building and health codes in inspecting newly constructed homes, most would agree that they are not likely to spend additional time conducting more intensive inspections going forward into the future.
In my own 35 years of experience practicing real estate law, I have never once been involved in a purchase transaction where a private building inspector has not discovered some irregularity that needed addressing. This includes every newly constructed home which a client of mine has had inspected prior to closing.
Inspectional standards have also changed over those 35 years as well. New technologies now permit private inspectors to examine, for example, mold and other air quality issues that never arose during my earlier years of practice. This does not mean, of course, that new technologies invariably disclose major defects, but they often do.
What about legal remedies, in case defects were not discovered prior to purchase or even where no professional inspections were performed on behalf of the buyers? It is a well settled legal principle that, unlike in other states (notably California, for one), homeowners who sell their houses are not liable for bare nondisclosure where a buyer makes no prior inquiry about a particular issue. In these cases a seller has no duty to speak up Swinton v. Whitinsville Sav. Bank, 311 Mass. at 678-679 (1942), Henshaw v. Cabeceiros, 14 Mass.App. at 227 (1982). There must be some affirmative act of concealment of the problem by the seller for them to be legally liable Salinsky v. Perma-Home Corp., 15 Mass.App. 193, 197 (1983).
New construction by a professional builder, however, does fall into a separate category. In Albrecht v. Clifford 436 Mass. 706 (2002), the Mass SJC announced a new principle of law: an implied warranty of habitability now attaches to the sale of new homes by builder/sellers in Massachusetts. The Court said that imposing this warranty was also consistent with the protections afforded consumers in other contexts. See Boston Hous. Auth. v. Hemingway 363 Mass. 184, 293 N.E.2d 831 (1973) (implied warranty of habitability in residential leases); George v. Goldman, 333 Mass. 496, 131 N.E.2d 772 (1956) (implied warranty in construction contracts to do workmanlike job and use reasonable skill). See also, G.L. c. 106, § 2-314 (implied warranty of merchantability for sale of goods). The purpose of this new implied warranty for newly constructed homes was to protect a purchaser from “latent defects that create substantial questions of safety and habitability”. While the scope of this warranty is to be left to a “case-by-case determination”, the Court stated that “a home that is unsafe because it deviates from fundamental aspects of the applicable building codes, or is structurally unsound, or fails to keep out the elements because of defects of construction”, would breach the implied warranty announced in Albrecht. The Court stated that parties to a residential new home construction contract could not agree in advance to “waive” the implied warranty.
You might ask, well is that not enough to protect a buyer of a newly constructed house? You should know another important fact about the case. The Albrechts actually lost the case, because they waited too long to notify the builder of the problems. How about this: they bought their home in 1993, discovered the fact in 1996, and the Mass Supreme Judicial Court announced their ruling in 2002. The Albrecht Court also announced a warning to consumers when it ruled against the Albrechts in the case:
“It was not reasonable as a matter of law for the Albrechts neither to inspect nor to use the fireplaces [claimed to have been defective before the end of the contractual 1 year period]”
Other cases confirm that a home buyer cannot comfortably rely on their right to sue other involved parties after the fact when a defect is discovered once they take possession of their newly constructed home. In Pelletier v. Chicopee Sav. Bank 23 Mass.App. 708 (1987), the Court held that a bank had no statutory obligation to guarantee that their appraiser would inspect for structural defects, even when the loan officer had told the buyers that we (the bank) “will take care of everything”. There was no obligation on part of bank to obtain structural mechanical inspection or to advise the buyers that such inspection would not be done by the bank. Similarly, a listing broker without actual knowledge of a zoning defect has no duty to determine whether the property complies with existing zoning requirements Quinlan v. Clasby, 71 Mass. App. Ct. 97 (2008), although misrepresentations on the part of a real estate broker can actionable under G.L. c. 93A if a broker should have had knowledge of a problem Mongeau v. Boutelle, 10 Mass. App. Ct. 246 (1980). In Lawton v. Dracousis, 14 Mass.App. at 170 (1982) there was no 93A liability where a broker informed buyer that there were no building code violations when, in fact, there were, because that broker was not aware of such violations. Where a buyer inquired numerous times about leaks and was told by a broker that a condo unit did not leak, the Court found a broker liable for misrepresentation in Brenner v. DiGiulio 74 Mass. App. (2009). One thing is clear. The cases do not offer a clear path to a certain result. As lawyers are fond of saying, “it depends”.
I am myself, a veteran of over 30 years of representing clients in various types of litigation. I can attest that litigation is expensive ordeal and litigants almost never achieve a perfect outcome. As a dollar for dollar comparison, a professional building inspection is a much better investment than litigation. Irregularities discovered by the inspector can become part of the issues negotiated between the buyer’s attorney and the builder prior to the signing of a final purchase and sale agreement. Having the results of a building inspection may or may not lead to price concessions by the builder, but in any event it will provide peace of mind for the future. As the credit card commercial tells us, that’s “priceless”.

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