If you run your company as carefully as you bought your home, you're probably racing to file for bankruptcy. "It surprises everyone," says tax attorney and CPA Martin Shenkman, "but seemingly little items, like whose names are on the deed, can really come back to bite you later on." According to Shenkman, in the rush to purchase their dream house, most buyers - and their advisors - fail to see this acquisition as worthy of major investigation and planning.
Shenkman offers advice on avoiding home buying pitfalls at a seminar offered by the New Jersey Institute of Continuing Legal Education on Thursday, August 9, at 9 a.m. at the Holiday Inn in Saddle Brook. Cost: $155. Visit www.njicle.com. This seminar is aimed at attorneys, accountants, financial advisors, real estate sellers - and to home buyers.
In order to cover all aspects of the process, the Shenkman panel includes accountant Neil Becourtney of Roseland-based J.H. Cohn; Brian Boak of Teaneck insurance company Singer Nelson Charlmers; Joseph Fazio, the Bank of New York's division head for Lending Private Client Services; attorney Gregory Meese, editor of "Land Use Citator;" Anita Siegel, attorney with the Morristown law firm of Siegel & Bergman; and attorney Shana Siegel, based in Fair Lawn.
Shenkman's previous lecture on the laws surrounding the purchase of a home was supposed to be a rather pedestrian lecture, with the only perk being that he was to give it in Las Vegas. Shenkman had been invited to cover the legal ways in which a home can be owned. He yawned, accepted, and in way of preparation tapped his computer for a list of past clients who had ever had home ownership and title disputes. He then sat in awe as a document of no less than 60 pages scrolled out of his printer.
A native of Detroit, Shenkman earned a bachelor's degree in economics from Wharton College in l977, followed by an MBA from Michigan University and a law degree from Fordham University. Also a CPA, he worked as a tax attorney in Manhattan before opening his own firm in Teaneck. As Shenkman prepared for his Las Vegas lecture, he began to discover that homebuying is one of the least advised - and most important - financial transactions that the average American makes.
Of the 74,833,000 individually owned homes in the United States, more than 8.3 million are sold every year.
"The current house sale transaction system is not going to acquaint the buyer with all the considerations he needs to take in," says Shenkman. With the average attorney charging $600 to $800 for a house closing, few are giving an extended legal course in property taxation, bypass trusts, and post-nuptial agreements.
But for most direct Q & A-style homebuyer advice, check out Shenkman's www.laweasy.com.
Home buyers need to become educated on a number of important aspects of the transaction, including:
The humble deed. With more than 20 types of deeds and signing possibilities available, it pays to plan and individualize. For example, if the wife is a doctor and the husband is a teacher, she faces a far greater liability potential from malpractice than he. To protect against the loss of home, they could put only his name on the deed.
But does she really trust him to own the house alone? If not, they could hold the house via "tenancy by entirety" - a special ownership that protects the house from creditors and malpractice. Yet to overcome this method's drawbacks, a trust might need to be added. Safety seems to signify complexity.
Supposing you have just carried your bride over the threshold of the home you have owned for five years. Wanting to make her a full partner in your life, you want to add her name on the deed. Even here, caveats abound. First, many mortgage contracts require that the lender approve the new name on the deed. If they don't like your wife's credit history, the lender may not allow you to add her name to the deed. Second, the husband's property insurer must be notified, and don't be surprised if, with the new dual ownership, premiums climb a bit higher.
Joint tenants by right of survivorship is the most popular deed type for married couples. This gives each party an undivided interest in the house, with the full ownership passing to the remaining spouse upon death of the other. But for tax reasons, some marrieds prefer a deed providing tenancy in common. Here each party owns a divisible half of the house. Such tenancy allows owners to develop what is termed as a Bypass Trust, which protects the home from creditors and estate taxes.
Tax and transfer. One of the most frequent questions clients ask Shenkman is "How can I protect my home from taxes after I die?" His answer is invariably, "That depends. Each situation differs."
While the client fumes over this seeming non-answer, Shenkman explains that home transfers face three types of taxes: state, federal, and capital gains. Each must be weighed against the other.
If mother is moving to nursing home from the home she's lived in for 35 years, what should she do with the house for which she paid $10,000, and which is now worth $300,000? This plus another $350,000 in personal assets is her total wealth. Transferring the house now would leave her with a $290,000 profit. This far exceeds the $125,000 once-in-a-lifetime sale exclusion rate. She may be better off holding the house and transferring it to the children in her will.
Compare transfer options with the estate benefits gained from a variety of vehicles, including a lifetime right. Here the mother could use the property, rent it, and upon her death, with no probate, it would pass to the children.
For higher-priced properties it may pay for the children to buy the house from the mother, who then returns the children their purchase money using the annual $12,000 gift exclusion. "But all such maneuvers entail a very great amount of sophistication, and should not be attempted without some trusted advice," says Shenkman.
That second home. Insurance companies just never pay settlements to liars. Yet every year, hundreds of new second home owners try to claim that this new vacation house as their primary residence in hopes of getting a lower rate.
"The problem comes when a renter sues and makes a claim on your company," says Shenkman. In fact, such a prevarication on the contract is typically seen as a loophole to void any claim.
"Some of the most acrimonious battles I have ever seen are between heirs fighting over a vacation home," says Shenkman.
Who is responsible for upkeep costs? When one child spends the month of August in the house, does he pay rent? How much? To whom? All too often too little is spelled out. The simplest solution is for the heirs to sit down as soon as the home is built, and to write out a clear agreement covering usage and costs. Heads are much clearer than they will be at the wake.
One of the most tax and stress alleviating formats of second home transfer is the Qualified Personal Residence Trust (QPRC). Here the homeowner, generally an elderly parent, holds the house for a given term, after which it passes directly to the children or into a trust for them. All money made from the property after the transfer date is removed from the owner's taxable estate. Also, for gift tax purposes, the house's valuation may be decreased substantially.
Be it a vine covered cottage or grand villa on the hill, a person's home remains a glistening asset with many hungry eyes upon it. The government wants a piece, as do insurance companies, mortgagers, relatives, litigators, various heirs, and even unseen girlfriends from the past. To keep it whole, uninvaded, and finally passed on to those you intend, invest some time upfront in researching ownership options, and invest some money in getting expert advice.