PROTECTING YOUR HOME: DOES PLACING IT IN TRUST HELP OR HURT?
By Herbert Weinberg
The family home has an intrinsic value more than its monetary worth. Consequently, people seek to protect their home from creditors especially before entering a risky venture so that their children and spouse can always stay in the family home.
It is commonly believed that placing a home in trust is the best way to protect one’s home from creditors. It is so common that I have been told many times that an accountant or even an attorney tells a debtor that they have a great trust document prepared by an attorney specializing in trusts and offers to revise the form at minimal or no cost. Trusts do not automatically protect houses from creditors and, in fact, placing property in trust can result in one losing any protection from creditors as will be explained.
A common mistake that results in the loss of creditor protection is the Trust has the same person as settlor, trustee and beneficiary. Similarly, a beneficiary will have themselves appointed trustee when the original trustee dies. In both circumstances, any protection from creditors is lost. The reason is that the land reverts back to the beneficiary when she is also the trustee.
Another common mistake is placing a property in trust after one is financially distressed. It is unwise most of the time because a conveyance within four years can be undone as a fraudulent conveyance if one is insolvent. Needless to say, both bankruptcy and non bankruptcy law preclude any use of otherwise available legal means to protect assets fraudulently conveyed. There are many other circumstances where placing a property in trust can do more harm than good.
In fact, the best way to protect one’s home is to file a homestead declaration. To receive protection from creditors one only has to record a homestead declaration at the local Registry of Deeds. It results in $500,000 of equity in the home being protected from creditors who claims arose after the filing of a homestead declaration. If a bankruptcy is filed, the $500,000 of equity protected by the homestead is superior to all unsecured claims and one may even be able to avoid liens against one’s home.
As a client of mine has recently learned, placing a property in a trust can result in one losing the protection of a homestead declaration resulting in the property being found to have no protection from creditors. She placed the property in a nominee trust where she retained control of the property in the trust. On one hand, the retention of control caused the court to find that the house was truly hers On the other hand, the Court found since the house was in a trust, it was ineligible for protection of a homestead declaration since only people, not trusts, can file a homestead declaration. This case is on appeal.
We have seen many other defects in trusts that place the family home in jeopardy. Most of the time, we have still managed to save the home but it has often required extensive, if not risky legal maneuvering.
Placing property in trust can achieve many goals for both estate planning and asset protection. As true with any tool, it can do either great good or great harm. Please feel free to call us if you wish to explore if placing your home in trust fits your circumstances or wish for us to review your current trust.
AN OVERVIEW OF LIKE-KIND EXCHANGES Normally, capital gains are recognized and taxable upon the sale of property. The Tax Code provides an exception to this rule for certain exchanges of property. If all requirements are met, any gain from the exchange is not taxed, and any loss cannot be deducted. Gains or losses will not be recognized until the person who received property in the exchange sells or otherwise disposes of it. The most common type of nontaxable exchange is the exchange of property for the same kind of property, or like-kind exchanges.
To qualify as a like-kind exchange, the property traded and the property received must be both (1) qualifying property and (2) like property. Qualifying property must be held either for investment or for productive use in a trade or business. Typical examples include machinery, buildings, land, trucks, and rental houses. Like property refers to the nature or character of the property. Characteristics relating to the grade or quality of the property are immaterial. All real estate is like-kind to all other real estate, whether or not one or both of the properties are improved. Similarly, an exchange of personal property for similar personal property is an exchange of like property.
Because a straight swap of property is often impractical, the Tax Code allows deferred like-kind exchanges. If the transaction is structured properly, a person can sell one property, have the proceeds held for a period of time, and then use the proceeds to buy new property. The seller must identify the replacement property within 45 days of selling the relinquished property. Also, acquisition of the replacement property must take place within 180 days of the sale of the relinquished property, or the due date of the taxpayer’s return for that year, whichever is earlier.
It is common to use a qualified intermediary in making a deferred exchange of like property. A qualified intermediary is a person who enters into a written exchange agreement to acquire one party’s property and transfer it to a second party, and also to acquire replacement property from the second party and transfer it to the first party. The agreement must explicitly limit the first party’s rights to obtain in any way the benefits of money or other property held by the intermediary. A qualified intermediary cannot be either an agent or a relative of the “exchanger.”
There are special rules for like-kind exchanges between related persons. In this context, “related persons” include not only spouses, siblings, parents, and children, but also a corporation in which an individual has more than 50% ownership, and a partnership in which an individual owns over 50% of the capital or profits. For a like-kind exchange between related persons, the ability to postpone tax liability for the gain from the exchange is lost if either person disposes of the property within two years after the exchange.
An exchange of like-kind property is only partially nontaxable if the taxpayer also receives money or unlike property in an exchange that produces a capital gain. In that case, the gain is taxable, but only to the extent of the money received and the fair market value of the unlike property.
Factors to Consider
In general, three basic factors may be considered in deciding whether a like-kind exchange will make sense. The exchanger should (1) receive property with a price equal to or greater than that of the relinquished property; (2) have as much, or more, debt in the acquired property as in the property given up; and (3) take no cash out of the transaction. While these are good general guidelines, they are not a substitute for sound advice from an attorney familiar with all of the requirements for a valid like-kind exchange.
UNAPPROVED OVERTIME: WHEN IS AN EMPLOYER OBLIGED TO PAY IT?
An enforcement action by the U.S. Department of Labor resulted in a ruling that nurses were employees, not independent contractors, of a staffing agency that provided them on a temporary basis to hospitals. After this ruling, the agency took action to attempt to deter unauthorized overtime by the nurses and to avoid having to pay time and a half for such hours. It adopted a policy, printed on all of the nurses’ time sheets, stating that the nurses had to notify the agency in advance of any hours exceeding 40 hours a week. If they did not, the notice stated that the nurses would be paid for such time only at their regular rate.
When nurses who had worked overtime hours at hospitals without notifying the agency ahead of time sought to recover pay at the overtime rate, they prevailed despite not having followed the employer’s policy. A federal court ruled that the agency had not done enough to meet its duty under the federal Fair Labor Standards Act to “make every effort” to prevent performance of unauthorized overtime work of which it had knowledge. The agency’s knowledge was present, albeit after the fact, as was evidenced by the nurses’ time sheets showing the unauthorized overtime that was worked.
Suggestions from the Court
The ironic lesson from the decision is that employers desiring to prevent unauthorized overtime by their employees must do so by essentially “getting tough” with the employees through enforcement of sufficiently strong disciplinary policies, and not simply by declining to pay for the unauthorized overtime hours. Although the agency suffered a defeat in the litigation, the court’s opinion offered suggestions for alternative approaches that it or other similarly situated employers can take in the future to deter unauthorized overtime while complying with federal law.
For example, an employer could keep a daily, unverified tally of its employees’ hours and reassign shifts later in the week that would otherwise result in overtime, or it could refuse to assign any shifts to employees who habitually disregard an overtime rule. Whereas the agency had admitted that a nurse who disregarded its preapproval rule faced no adverse consequences beyond getting only straight-time wages for the ensuing overtime, if it were serious about preventing unauthorized overtime, said the court, the agency would discipline nurses who violate the rule.
According to the court, an employer could even entirely disavow overtime hours, announcing a policy that it will not, under any circumstances, employ an individual for more than 40 hours in a week. Under such a policy, any hours over the limit would not be compensated for the employee.
HOME IMPROVEMENT SCAMS
Your home is your castle . . . and it is also probably your most valuable investment. Unfortunately, many homeowners unwittingly hire crooked contractors to improve or repair their castles, and they wind up being cheated out of money or paying for inferior work. The home improvement business is crawling with cheats. Before signing on the dotted line, remember the following:
* Be wary of a salesman who comes to your home uninvited, especially if he claims he was doing some work for your neighbor or was just “in the neighborhood.”
* Ask for references, with names and telephone numbers–nothing drives away a swindler quicker than a request for references.
* Beware of the low-ball bids or offers that seem too good to be true, because they usually are.
* Beware of people who ask for a large “deposit” or ask to be paid in full before the work is done.
* Read everything carefully before you sign it, and make sure you understand all of the terms.
* Do not sign a contract with blanks in it.
* Beware of a salesman who claims that his offer is for a “limited time” or is “today only,” especially where he is pressuring you to sign before you have read the contract.
If you have a complaint about your home improvement project, begin by trying to resolve it with the contractor. Honest mistakes can occur and can be easily corrected. Make sure to follow up with a letter that you send by certified mail and keep a copy for your records. If this approach is unsuccessful, contact your local or state consumer protection office.
Jonathon Friedmann was recently inducted into the Litigation Counsel of America at the LCA’s Spring Conference and Induction of Fellows in Miami. The Litigation Counsel of America is a trial lawyer honary society composed of less than one-half of one percent of American lawyers. Fellowship in LCA is highly selective and by invitation only. Fellows are selected based on effectiveness and accomplishment in litigation, both at trial and appellate levels, and superior ethical reputation. LCA is a trial and appellate lawyer honorary society which represents the best in law among its membership.
Melanie J. Debrosse recently joined our litigation department. She is a 2007 graduate of Thomas M. Cooley Law School. She obtained her undergraduate degree from Brandeis University. While in law school, Melanie was a student attorney with several non-profit organizations. Melanie enjoys traveling and has lived in both France and in Spain. She is fluent in four languages.
Tracy Brown joined our law firm as an assistant to Tony Leccese and Jay Worthen, specializing in real estate law. She and her husband have a 3-year-old son with whom they enjoy spending time, doing activities, and going places. Tracy also plays on an indoor soccer team.
Kendall Wright is our new receptionist. She is a recent graduate from Fisher College with a major in fashion design. Kendall currently attends Northeastern University with the intention of getting her paralegal certificate. She spends most of her time in New Hampshire with her parents.