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Big tax-saving opportunity is available only until the end of the year

An enormous opportunity for families to reduce their estate taxes – and in some cases, save millions of dollars – will end on December 31, 2012. If there’s a chance you can take advantage of these savings, it’s wise to act immediately, because unless Congress changes the law, the window of opportunity will close permanently when the ball drops on New Year’s Eve.

Between now and the end of the year, the lifetime exemption from the federal gift tax is $5.12 million. But on January 1, 2013, this exemption is scheduled to be reduced drastically, to just $1 million.

The gift tax applies anytime you make a gift to someone other than a spouse or a charity. In general, you can give any person (or a trust) up to $13,000 a year without there being a gift tax. But if you give someone more than $13,000 in a calendar year, then the tax applies to the excess.

However, you also have a “lifetime exemption.” Over the course of your lifetime, you can make gifts over the $13,000 annual threshold up to the amount of this exemption without paying tax. [Read more…]

Inherited IRAs can be a great idea

Leaving an IRA to your children or grandchildren can be a great idea. That’s because withdrawals from the IRA can be “stretched out” over many years, and the IRA can grow tax-free for decades, giving your heirs a huge tax benefit.

However, if you’re planning to leave an IRA to your heirs, it’s important to talk with them now about this strategy – so they understand how to take advantage of it.

A recent study by the AXA insurance company showed that 87% of children who inherit an IRA from a parent liquidate it within a year of the parent’s death.

Of course, in many cases, the children may have an immediate need for the money. But it also seems likely that there are a large number of cases where the children simply don’t understand the tax advantages of leaving the assets in the IRA – because the family never had a discussion about it.

This is one of many areas of estate planning where the best-laid plans sometimes go awry if the heirs don’t fully understand how the plans are supposed to work.

Top Notch Real Estate Attorneys

“Bardorf & Bardorf did an excellent job with our home closing. As first time buyers, we were very thankful for Mark Bardorf’s insights and timeliness which helped us correct serious problems created by the bank’s disorganized handling of our documents.”

– T. Sullivan, Real Estate Client

Landlords can be liable if tenant doesn’t pay

If a tenant hires a contractor to make improvements to a property, but the tenant doesn’t pay the contractor in full, can the contractor sue the landlord for the difference?

It sounds unlikely, but it happened in one case recently.

Former Boston Celtics player Dana Barros leased a warehouse and hired a contractor to make improvements so he could turn it into a sports complex. Later, the contractor believed it hadn’t been paid in full, so it went to court against Barros and against the owner of the warehouse.

The warehouse owner argued that it couldn’t be sued because it was merely the landlord; it never signed an agreement with the contractor.

Most states have what are called “mechanic’s liens, such that if a contractor isn’t paid in full by someone for work on a property, it can place a lien on the person’s interest in the property. [Read more…]

Equalize Family Gifts in 2012

There’s a limit on how much money you can give away each year without paying gift tax. For 2012, for instance, you can give any person up to $13,000 without paying tax.

Many people make annual gifts to family members as part of their estate planning. This is a smart idea, but one problem is that over time it can result in unequal gifts to different parts of a family.

For instance, Edna has three children: Alan is single, Stella is married with one child, and Andy is married with four children. Each year Edna gives $13,000 to each of her children, their spouses, and her grandchildren.

But that means that Stella’s family gets three times the amount of gifts that Alan gets, and Andy’s family gets six times the amount of gifts that Alan gets. Over time, this has resulted in a very large disparity in gifts, and Edna would like to equalize matters a bit.

Of course, Edna could leave more to Alan and Stella in her will, but that might be awkward.

An option for Edna is to take advantage of the large lifetime gift tax exemption in effect through the end of 2012.

During 2012, a person who hasn’t made any prior taxable gifts can give away up to $5.12 million without paying any gift tax. A married couple can give away up to $10.24 million. (These amounts are scheduled to be reduced to $1 million and $2 million in 2013.) [Read more…]

Reasons to always have a property inspected

A couple who purchased a condo in a building that turned out to be contaminated with toxic chemicals can recover only 65% of their losses, because they could have arranged an environmental inspection of the property before they bought it but didn’t do so,  a Court of Appeals recently decided.

The couple bought a condo unit in a converted factory. The developer had installed a vapor barrier, but never actually decontaminated the dangerous chemicals on the site.

The buyers claimed that the seller’s real estate agents assured them the site was safe. It appears the agents believed that was true at the time, but when they later found out that the site still had problems, they didn’t say anything.

According to the court, the agents could still be liable, because even though they didn’t technically lie, they had a legal obligation to tell the buyers about the problems once they knew about them.

A couple who claimed they were misled about a property can’t recover all their losses, because they could have discovered the problems by hiring an inspector.

On the other hand, the court said the buyers were partly at fault because they never obtained an environmental inspection. The buyers merely relied on the agents’ statements, along with a local newspaper article and public “buzz” suggesting that the factory had been cleaned up.

A jury found that the agents were 65% at fault and the buyers were 35% at fault, and the court said this was correct – so the buyers can recover only 65% of what they lost.

The Importance of Flood Insurance

Many people are surprised to discover that their standard homeowner’s insurance policy does not cover them in the event of a flood.

If you want flood insurance, you generally have to buy a separate policy. Typically these policies are sold by private insurers, but are backed by the U.S. Government through the National Flood Insurance Program.

Some federally backed mortgage programs require homeowners to buy flood insurance if they live in a high-risk area. Some private lenders require this as well, and they may require it even if the property is not in a high-risk area.

You should note that just because a property is not in a high-risk area doesn’t mean that flooding is impossible. High-risk areas are typically low-lying regions that are subject to storm surges or overflowing rivers, but even property in a very low-risk area can still be flooded due to heavy rainfall, drainage system failures, or a broken water main.

In fact, about 27% of all insurance claims for flooding are brought by property owners who don’t live in flood zones. [Read more…]

How to transfer a family business to the next generation

Many people who seek estate planning advice are owners of family businesses, and one of their chief concerns is how to pass on the business to the next generation.

The fact is, there are almost as many ways to transfer a family business as there are family businesses. There’s no way to know what’s best for you without a thorough discussion of your goals, your family, and your complete financial picture. However, there’s no question that dealing with a family business is an essential aspect of planning your estate.

Here’s a broad, general look at some of the ways in which a business can be transferred to your children:

Put it in your will. You can give your interest in the business to your children in your will. This is simple, and it allows you to keep complete control of the business for as long as you live.

There are some downsides to this method, however. Some business owners think that their children will benefit from having an ownership stake in the business while they learn to manage it. Some owners worry that as they get older, they might no longer be competent to fully run the company’s affairs. In addition, there may be very significant tax advantages to transferring all or part of the business while you’re still alive. [Read more…]

The Tax Advantages of Buying, Selling, Refinancing Real Estate

Owning a home provides a lot of tax advantages. Sometimes, though, the rules can be tricky.

Here’s a brief introduction to some of the many tax rules involved in buying, selling, or refinancing a home. But remember, the rules are complicated, and there are always exceptions. You’ll want to consult your RI real estate attorney or tax advisor to see how the general rules apply to your specific situation.

  • If I own a home, can I deduct my mortgage interest payments?

Yes, home mortgage interest is generally deductible on your federal income tax return on loan amounts up to $1 million. To get the deduction, you’ll need to itemize your deductions on Schedule A. For most people, this is the primary tax advantage of owning a home.

Your lender will typically send you a notice at the end of the year telling you how much of your payments were for interest as opposed to principal.

  • Can I deduct my property taxes?

Yes, in most cases you can deduct your local property taxes on your federal income tax return – again, if you itemize deductions.

Homeowners often pay some money each month as part of their mortgage payment that goes into an escrow account, which the lender then uses to pay property taxes. Note that the amount you can deduct is the amount that’s actually paid in taxes – not the amount you pay into this account, which might be slightly different.

Some types of property taxes – such as special one-time assessments for sidewalks or sewer lines – might not be deductible. Also, condo fees and homeowners’ association fees are not deductible. [Read more…]

Moving? Update your estate plan

If you plan to retire and either move or away from Rhode Island, its a good idea to speak with your estate planning attorney about the estate laws in the state  to which you are moving.

Of course, your estate plan should be updated any time you make a major change, such as buying or selling real estate. But even if you’re not buying or selling anything, it’s wise to review your estate plan when you move because different states have different laws about how estate documents are interpreted.

For instance, New Yorker Rosanne McGathy wrote a will in 1997. She moved to Arizona in 2005, and she passed away several years later. Her will made specific bequests to several trusts for relatives, and left the remainder of her estate to some other relatives and charities. McGathy had other assets that went to people outside the will, including a home she co-owned, a life insurance policy, and an annuity.

Under New York law, if a will doesn’t specifically say who pays the estate taxes, then the taxes are apportioned among all the assets, including the trusts, the home, the life insurance and the annuity. [Read more…]