Posts in: June

The Realities of Litigation

June 27, 2017 Business planning, Law, Litigation Comments Off on The Realities of Litigation


For most people involved in a dispute, declaring the words “See you in Court!!” can seem like the perfect threat or even feel therapeutic at the least. Some even presume that by stating “I’m going to sue you” is like declaring nuclear war against the other side and the person or company that wronged you will certainly want to ‘settle’ because you have scared them with a lawsuit.

However, people who have actually been participants in litigation soon realize that there is no such thing as “inexpensive litigation,” and many individuals, fueled by the passion of a person scorned, proceed hastily to the courthouse seeking vindication or retribution without having a full understanding of the realities that they are getting themselves into.

Certainly, one of the great hallmarks of our society, and what separates the American system from many others around the world is an independent judiciary. But again, the media frequently oversimplifies what is actually involved in the legal process with its sole focus on sensationalizing the outcome thereby conveying a misleading impression of the actual litigation process.   Here are a few misconceptions I frequently encounter with clients about the litigation process include the following:

  1. Are you ready for the PROCESS? Unless you are in small claims, you generally don’t just file a lawsuit and then get to see Judge Judy the very next day. Media usually focuses on “trials” only, but ignores the months (usually years) of pre-trial procedure needed to get to that point.    Litigation usually begins with a “Complaint” which begins the “pleading” phase where the parties set forth their allegations and responses in defense. Sometimes there could be challenges to the pleadings through the motion process, which add additional expense and delay. Once the pleadings are done, then the parties have the opportunity to require other parties to the lawsuit to answer questions, produce documents, or take testimony of witnesses (the “discovery” phase). It should come as no surprise that parties to litigation are not always so eager to provide information that may hurt their case, and so the discovery process can often take months or years with parties jockeying in court over who should get what.   Assuming the parties have completed discovery, that does not necessarily mean you go to trial.   Trials only occur when there are actual factual or legal issues in dispute which requires a judge or jury to determine, and the reality is that most lawsuits do not go to trial. Although the cost of litigation varies depending on the location and issues involved, what I usually tell clients is the cost to go through these procedures to litigate a normal civil matter from Complaint up to but not including trial, doing a minimal amount of work, can easily run between $50,000 to $100,000. Preparing for and conducting a trial can substantially increase these costs and so unless you’ve retained an attorney on contingency, the expense and delay litigation is definitely an important consideration for most litigants.
  2. Does the Opposing Party have Assets to Satisfy Your Claim?  Usually this is the first question I ask a client contemplating litigation, and many times it is question the client hasn’t considered. It makes no financial sense to pay tens to hundreds of thousands of dollars on a case if the defendant has no money.  Although I’ve had my share of clients walk into the office wishing to sue “on principle” or “just to make a point,” these moral considerations usually get thrown out the window very quickly once we begin to discuss the costs that will be incurred to get them to where they want to be.   So unless the opposing party has significant, identifiable assets that may be exposed in a lawsuit, or there is sufficient insurance to cover the claim, many potential litigants find themselves having no remedy for their claim because the opposing side is essentially “judgment proof.”
  3. Do you realize how unpredictable litigation can be? This should go without saying, but I spoken with plenty of people contemplating a lawsuit express confidence that a judge or jury would find them in the right. In litigation, it is less about who is wrong or right and more about what you can prove. Court decisions are ultimately made by people who come from all types of backgrounds and from all walks of life, and attorneys in high stake cases often employ professional “jury consultants” and perform “mock trials” to gauge how a jury will likely view their case. Despite all the money that is spent on attorneys, consultants, experts and the like, even the best attorneys with the greatest of resources lose cases, and most of us have probably followed cases in which we were surprised by the outcome. From a legal perspective, the reason there are trials is because there are issues of law or fact in which “reasonable people can differ.” If every issue in a case was a “slam dunk,” then there would be no need for a trial.

For these reasons and more, I consider litigation to be the option of last resort. Although the media likes to portray litigation and trials as dramatic and full of suspense (which it certainly can be), they leave out the cost and the time consuming process.

Consider interviewing several litigation firms before embarking on your lawsuit and make sure you weigh all the pros and cons of a long draw out lawsuit. It doesn’t mean litigation shouldn’t be a tool, threat or productive option in your dispute, but just go into the process with your eyes wide open.

How to Donate to Charity and Beat the Tax Man

June 20, 2017 Estate Planning, Real Estate, Tax Planning Comments Off on How to Donate to Charity and Beat the Tax Man

I have a close relative who works in fund-raising for a fairly large university.  While he loves receiving large charitable donations in the form of immediately available cash or other marketable assets (such as real estate and publicly-traded stock), he knows that such donations are often simply not possible or practical for the average person.  This is why a huge buzzword in the world of fund-raising for non-profits is “Planned Giving.”

What Is “Planned Giving”?

Planned Giving is the present day legal commitment by a donor to give some assets or property to a charitable organization or institution at a future date. The future date is usually the death of the donor.

There are several types of planned gifts. Some people make outright gifts of assets such as appreciated securities or real estate.  Some planned gifts are payable upon the donor’s death such as a life insurance policy where the beneficiary is a charitable organization.  Still other planned gifts provide a financial benefit, as well as a tax deduction, for the donor.  Examples of this are: 1) Charitable Remainder Trusts, which provide an income stream for the donor, and at the death of the donor, the charity receives what is left in the trust; and 2) Charitable Lead Trusts, which essentially do the opposite and produce a stream of income for a charity, and the donor’s heirs receive what remains in the trust when the donor passes away.

What Is a Charitable Remainder Trust (“CRT”)?

A CRT is a tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to a designated charity. If you have a highly appreciated asset (e.g. real estate), the CRT will avoid capital gains taxes that would otherwise be due if you or your company sold the asset.

Who Should Be Thinking About a CRT?

People who:

  • Have a highly appreciated marketable asset (usually real estate or stock);
  • Want to save on taxes (i.e. they don’t want to take the capital gains tax hit);
  • Want an income stream over the rest of their life or over a certain number of years;
  • Want to make a donation to charity; and
  • Want to totally or partially disinherit their children. This isn’t the case if you structure it correctly!

How Does a CRT Work?

The diagram below goes through the steps involved in a CRT.  However, in a nutshell:

1)   A tax-exempt trust is created with the help of a professional.

2)   The donor places the asset in the CRT.  Are taxes due here?  No – and the donor gets a charitable deduction for making the donation that he/she can carry forward for up to five years!

3)   The property is sold to a third party and the proceeds are deposited into a CRT-owned account.  Are taxes due here?  Not if the property is owned free and clear!  These proceeds are then invested, and no taxes are owned when those investments appreciate in value!

4)   Payments in a set amount or set percentage are made from the CRT account to the donor on a regular basis (quarterly, annually, etc.).  Payments are either made for the life of the grantor or for a term of years.  Are taxes due on this income?  Yes, but the charitable deduction gained when the donation is made can be used to offset at least some of this income!

5)   The donor can use some of the income from the trust to buy a life insurance policy in order to make sure their heirs aren’t left out in the cold.  Do beneficiaries owe tax when they receive life insurance proceeds?  No!

6)   In some cases, the life insurance proceeds may be in the multiple millions of dollars, and could cause an estate tax problem for the heirs.  This issue can be taken care of by the proper use of an Irrevocable Life Insurance Trust (“ILIT”) – which is another subject for another day.

7)   At the death of the donor, or at the end of the term of years, whatever remains in the CRT is donated to the charity.  Does anyone owe taxes here?  No!

 

 

Who Are the Winners and Losers in a Properly-Structured CRT?

1)   The Donor – Winner!  Because he or she gets to avoid the capital gains hit on selling a highly appreciated asset, gets a tax advantaged stream of income, and gets to make a charitable donation that gives them warm fuzzies – and may end up helping to get their name on a building at their favorite university!

2)   The Charity – Winner!  The charity gets an irrevocable promise from the donor to donate assets at some point in the future.  With good investment of the funds in the CRT, the final donation to the CRT can end up being significant.

3)   The Donor’s Heirs – Winners!  Instead of inheriting a piece of appreciated real estate that they need to market and sell, they get tax-free life insurance proceeds, and will avoid possible estate tax issues if an ILIT is used.

4)   The IRS – Loser (for once)!  When properly structured, the only taxes paid in all of these transactions are those owed by the donor when they receive payments from the trust.  However, the charitable deduction will offset at least some of this income.

Now, there are plenty of details to sort through, but please give me a call if you’d like to discuss the CRT further and find out if it is something that might make sense for you.

6 Tax and Legal Tips When Investing in Real Estate

June 6, 2017 Real Estate Comments Off on 6 Tax and Legal Tips When Investing in Real Estate


Sir Francis Bacon put it best when he said, “knowledge is power”.  Not only does he have a great last name but he gives good advice that applies to all facets of life including investing in real estate.  Whether you are new to real estate investing, or a seasoned investor, before you rush off to make your first/next real estate investment, consider the following tips all of which are to help you be strategic about investing in real estate the right way for your situation, i.e. knowledge is power.  With that in mind, here are six tax and legal tips / questions to ask yourself when investing in real estate:

  1. Will you invest directly in real estate by yourself / with a small number of business partners OR invest indirectly alongside many other investors in a company that invests in real estate? For example, let’s say you invest $200,000 for 5% ownership of a company that will take your funds and, along with the funds of other investors, probably in the millions of dollars, invest in real estate. In this situation, you typically have very little control or decision-making authority, such that you are basically “parking” your money and somebody else will make decisions regarding the real estate investment such as what to acquire, how to manage it, when to sell, etc.    There is nothing wrong with this type of investment, you may actually desire that, but you want to understand this going into the investment and not have false expectations. You should consult with an attorney before signing documents to invest in real estate through a company, particularly one in which you are a minority owner.  Contrast that with a situation in which you invest $200,000 along with a friend or business partner to buy an investment property.  In this situation, you have a lot more control over the real estate investment, but that comes with more responsibility and potentially more liability.  Again, you should consult with an attorney to make sure you are setup properly from a tax and liability perspective and also to make certain you have the appropriate documentation between any business partners you may have in addition to the proper documentation to make your real estate investment.  Neither option is better than the other one – they are just different so before making your investment, you should consider which scenario makes more sense for you / which situation you are dealing with.
  1. Does your real estate investment require financing? There are many benefits that come with investing in real estate with financing/loans, such as minimizing the amount of out-of-pocket cash you have to provide.  However, anytime you have a loan, that means you have a lender, and if you have a lender, that means you have to play by their rules.  Sometimes having a lender is like dealing with a big gorilla on your back.  They have a legitimate interest in the property and want to make sure their interests are properly protected.  So by financing a property, you tend to lose a bit of control.  You should have an attorney review any loan documents so you understand the rules of the game with that particular lender as it will affect your deal.   Without involving a lender in your deal, you get a bit more flexibility and control of the deal but of course this assumes you have all of the cash necessary to complete the investment.  Further, if you own properties outright i.e. no financing, that typically means there is a sizeable amount of equity which may require some additional consideration and structuring in terms of asset protection.  Again, neither option is better than the other one – they are just different which is why before making your investment, you should consider which scenario makes more sense for you.
  1. Are you going to invest in real estate inside your retirement account OR outside your retirement account? For the average person, they probably have no idea they have the option to invest in real estate inside their retirement account. But for most of our clients, it is a large part of how they invest in real estate.  In fact, many of them invest in real estate inside AND outside their retirement account.  Knowing the difference between the two and the impact it has is crucial.  If you invest in real estate inside your retirement account, the income is typically either tax-deferred or tax-free.  This is probably the biggest benefit to investing in real estate inside your retirement account.  However, there are a few more restrictions when investing in real estate INSIDE your retirement account versus outside your retirement account.  For example, inside your retirement account, you need to be aware of matters such as “disqualified persons”, “prohibited transactions”, “unrelated business income tax”, and “unrelated debt financed income tax”.  Such matters don’t exist when you invest in real estate OUTSIDE your retirement account.  Long story short, there is a ton of upside to investing in real estate inside your retirement account, but you should counsel with an attorney before doing so.  Yet again, neither option is better than the other one – they are just different so before making your investment, you should consider which scenario makes more sense for you.
  1. Is your real estate investment a long-term deal OR a short-term deal? This is especially important if you are simply one investor in a company that invests in real estate alongside a number of other investors because if the investment is long-term real estate, such as owning a commercial property, an apartment building, or even a single-family residence, your capital is typically “locked up” for a longer period of time as opposed to a short-term real estate deal such as a 12 month development project for immediate re-sell. Either way, you may be taxed on the income differently with a short-term deal than with a long-term deal, which is why it is important to understand before making your investment how you will be taxed on your income from your real estate investment.  Again, neither option is better than the other one but you should consider which scenario makes more sense for you.
  1. Understand the different ways to acquire investment properties. Besides cash deals and traditional financing deals, there are other ways to acquire investment real estate, such as seller financing, or “subject to” deals.  There are pros and cons to some of these less conventional forms of acquiring real estate.  One of the biggest benefits is, like traditional financing, it requires relatively little out of pocket cash.  However, when acquiring a property via seller financing or subject to existing financing, you should consult with an attorney to make certain the purchase contract properly reflects this type of financing.
  1. Understand the various ways to sell your real estate investment (Exit Strategy). The more you consider your exit strategy before making your investment, the better situation you will be in.  This is similar to #5 above, you might decide to sell via seller financing, or an installment sale, or a 1031 exchange.  These are some of the strategies you might consider to defer the capital gain income tax that would otherwise be due when you sell your real estate investment.

In sum, just because you have a friend or a relative who invested in real estate a certain way does not mean you should invest in the same manner.  For example, there is a big difference between someone who invests outside their retirement account as an investor in a company alongside a number of other investors in a short-term real estate deal versus someone who is invests inside their retirement account in a two-man partnership on a long-term real estate deal that is financed/has a loan.  These are two situations that will have different outcomes from a decision-making perspective during the life of the investment, the liability exposure, and the tax consequences.  So before you rush off to invest in real estate, please contact our office.  We can properly advise you and also make certain you have the right paperwork, contracts, entities, etc., for your particular real estate investment(s).