Posts by: leechen

Your Estate Plan and its Supporting Cast: Mini-Me, Thor, The Office, and The Titanic

May 22, 2018 Estate Planning Comments Off on Your Estate Plan and its Supporting Cast: Mini-Me, Thor, The Office, and The Titanic

When most people hear about an estate plan, they normally associate it with a trust.  Certainly the trust is the lead actor in the estate plan because the trust is designed to set forth the plan or instructions for what will happen to your assets in your trust upon your death.  For most people, making sure your legacy goes to who you want it to go to (or not!) is the primary reason to for estate planning.  However, estate planning is not limited to just what happens to our assets when we die, but also includes a supporting cast of other legal documents which, although it may not be as popular as the trust, serves very important purposes in your estate plan.  This usually includes the Certificate of Trust, the Pourover Will, the Durable Springing Financial Power of Attorney, the Durable Power of Attorney for Health Care and/or Living Will.

The Certificate of Trust

The Certificate of Trust is like the “mini-me” to the Trust.  It is most often used for purposes of legitimizing a transfer real estate held by your trust after you pass away.  If you die, and real estate is held in your trust, how would third parties know that the person that you appointed as trustee is, in fact, the actual trustee with authority to transfer the property?   One way would be for the trustee to actually provide the third party with a copy of the trust that confirms their appointment.  However, most people regard their instructions in the trust as private and would not want to have to give copies of their trust to some random third party, much less have it recorded with the county recorder as a public document.   For that reason, the Certificate of Trust is a certification by the Trustee that he/she is, in fact, the acting successor trustee, and is usually supplemented with language from the original Trust that confirms the appointment of the trustee, along list of powers that trustee is authorized to engage on behalf of the trust.  In the most common case, a successor trustee will record the Certificate of Trust in the county where the Trust is seeking to sell property owned by the trust so that there is evidence of the Trustee’s authority in the chain of title for the property.

The Pourover Will – The Lead Stand-in

The will is like the stand-in for its lead actor, the trust.   Not quite as flexible or useful, but important if something went wrong with the setup or funding of the trust.  Many people ask why they need a will if they already have the trust.  There several reasons why a will may be important but the primary reasons  include the following:


  1. If you fail to properly transfer assets into the trust (i.e. fund the trust), then the Pourover Will serves as a backup and provides that any assets left in your personal name will be transferred to the trust (hence the term “pourover will”). Completing your trust is only half the mission, the other half is making sure the assets in your name are properly transferred to the trust (e.g. by deed, beneficiary designation, entity transfer, etc.).  Failure to transfer an asset into the trust could result in a court probate for that particular asset at which point the will, not the trust, becomes the operative document.  For more information on funding your trust, see here:
  2. Nominating Guardians for minor children.  Since guardians can only be appointed by a court, the Will is usually used as the method for making decisions on who will take care of your minor children if you are no longer around (subject to court approval).   So if the parents pass away leaving minor children, the Will would generally be used to express their wishes with respect to guardians for the minor, but any provisions to ensure the guardians have sufficient funds or compensation to fulfill these duties would be set forth in the Trust, and so the Trustee of the Trust would work with the guardians (assuming they are not the same person) to ensure the financial needs of the children are met, subject to the rules of the Trust.

The legal representative for the Trust is the Trustee who is responsible for executing the instructions set forth in the trust.  By contrast, the legal representative who is responsible for executing duties under a Will in a court probate action is the Executor (sometimes also referred to as the Personal Representative or Administrator).   The Executor must be appointed by the court as part of the probate process and it is the role of the Executor to, among other things, gather and inventory the assets of the deceased, notify creditors, satisfy any of their claims, and distribute any remaining assets to the ultimate beneficiaries.   Most people would rather not go through this costly process and delay which is why it is important to set up the trust and make sure it is completely funded.

Best Supporting Cast :  Durable Power of Attorney for Finances and Durable Power of Attorney for Health Care

Whether you have a Will and/or a Trust, neither really takes effect until after your death.   So what happens if you have a medical condition where you are still alive but unable to make financial or medical decisions on your own.  This is where the supporting cast for the estate plan comes in.

The purpose of the Durable Power of Attorney for Finances and Durable Power of Attorney for Health Care (also sometimes referred to as Advanced Care Directive or Health Care Proxy in some states)  is to authorize another individual to make financial or medical decisions if you are still alive, but unable to make these decisions on your own.  For example, lets say you are severely injured in an accident and in a coma or have dementia, and therefore, are unable to make financial or medical decisions on your own. The Durable Power of Attorney for Finances would step in.

  •  Durable Power of Attorney for Finances operates via a trusted third party you choose (spouse, friend, adult child) who is able to make financial decisions, such as paying bills, selling assets, filing taxes, etc. on your behalf to prevent your money or assets from being locked up because you are not functional.   This type of power of attorney is different from a “General” power of attorney because, whereas the “General” power of attorney becomes effective once the principal executes it, this type of power of attorney only becomes effective once you become disabled and unable to make the decisions on your own (commonly known as a “springing” power because it “springs” into effect upon your disability).  It is “Durable” because it remains in effect even if you (as the principal) are incapacitated or mentally incompetent.      However, once you as the principal pass away, the authority granted by these power of attorneys terminates and is replaced by the Trust or Will.
  • The Durable Power of Attorney for Heath Care allows a designated individual to make medical decisions if you are unable to do so.  This can include consenting to or withholding  medical treatment.  So if you were in the unfortunate situation to be in a coma following the accident, the agent you appoint as your agent for health care can then decide to authorize or decline treatment on your behalf.  Most states have restrictions that prohibit naming certain individuals such as your health care provider as agent on the Durable Power of Attorney for Health Care.

The agent you select for either of these roles should be someone you completely trust and has the knowledge and sophistication to execute your wishes competently.  Giving someone durable power of attorney for your finances essentially gives them carte blanche authority to transfer your assets, and unfortunately, there are cases where the agent chosen under the power of attorney transfers property to themselves or engages in other self-dealing transactions.  If trust is an issue, consider appointing another person to serve as a co-agent to serve as a check on the authority of any one individual or use a professional trustee who is licensed and insured.  Talk with the people you are considering conferring these powers to make sure they are willing and have the moral, ethical and sufficient expertise to carry out your wishes.

The Living Will, the Grand Finale

The Living Will, depending on the state, may be a separate legal document or included in your Durable Power of Attorney for Health Care or Advanced Care Directive.  With the advances in medical technology allowing us to live longer, some of us may be faced with the decision whether we would want to be kept alive artificially if were in a persistent vegetative state.   Many of us who are old enough remember the Terri Schiavo case where Terri suffered a cardiac arrest and was in a coma.  A seven year legal battle then ensued between Terri’s husband and Terri’s parents whether she should be kept artificially alive or allowed to pass away naturally.   The Living Will takes away this uncertainly and allows you to express your wishes as to whether you would want to be kept alive artificially if you were in a persistent vegetative state or allowed to pass away naturally.

An estate plan is something that everyone can benefit from and is not just for the wealthy.  Certainly if you have life insurance or a home or investment/retirement accounts, an estate plan is highly recommended to make sure your wealth goes to who you want with your stipulations as to when and how.  Even if if you don’t have assets or a home, an estate plan can be beneficial for many other reasons such as, choosing a guarding for your minor children, if you have family or charities you wish to benefit, if you have a lot of valuable information in emails, social media or in the cloud that you don’t want to lose in the event of your death, or if you want to make sure your finances or medical situation isn’t held in limbo in the event of an unforeseen emergency.  The estate plan and its supporting cast allows you (not the government or some court) to plan your estate and/or medical decisions so that the legacy you leave is done on your terms.

Court Strikes Down the DOL’s Fiduciary Rule. Should this Matter to You?

April 10, 2018 Uncategorized Comments Off on Court Strikes Down the DOL’s Fiduciary Rule. Should this Matter to You?

On March 15, 2018, a federal appeals court based in Dallas, TX struck down the U.S. Department of Labor’s (DOL) so-called “Fiduciary Rule” in the ongoing war waging within the financial services industry for the past two years.  This Fiduciary Rule would have required any financial advisor providing investment recommendations relating to IRAs to act as a “fiduciary” which, in general, means that the advisor’s recommendation must be in the client’s best interest.  You may be saying “well, I thought my advisor was always acting in my best interest.”   Unfortunately this is very seldom the case.  As Mark Kohler notes in “The Business Owner’s Guide to Financial Freedom,” only about 1.6% of all financial advisors in the country are Investment Advisor Representatives that are required by law to make recommendations in your best interest.   If you have ever received investment recommendations from your bank, or from one of the big box brokerage firms, or from most institutional financial services companies, chances are the advisor who provide the recommendation was not required by law to act in your best interest.

The concept of a “fiduciary” dates all the way back to Roman civilization and traditionally referred to a relationship of trust, confidence, honesty and integrity.  The idea is that someone who is acting as an agent should be acting in your best interest of the principal.  Acting in your best interest as a fiduciary is commonplace in many traditional professions such as law or accounting, or when you are operating in a capacity as a “trustee,”  but the same is not necessarily true in the financial services industry.   Beginning  in the 1940s, the law created a distinction between investment advisors, who provided investment advice for a fee and were required to act as a fiduciary, and others including broker-dealers, insurance companies, banks, etc. who merely sold financial products (i.e. salespersons) and were paid a commission on their sales.  In the earlier years, it was easier to tell the difference between an “investment advisor” and a “stockbroker” based on the titles that they used.  However, with the advent of discount brokerages as well as the internet, the demand for the traditional “stockbroker” plummeted and so those in the financial services industry who were not investment advisors ditched the “stockbroker” title and began marketing themselves different titles like “financial planner,” “financial advisor,” or “wealth manager.”  Many consumers assume from these titles that they are obligated to act in your best interest, but most often that is not the case.

At this time, only advisors who are licensed as Investment Advisor Representative (IAR) who works for a Registered Investment Advisory firm (RIA) are legally required to provide recommendations that are in your best interest (i.e. the fiduciary standard).  All other individuals are bound only to the “suitability” standard which generally means they can recommend the investment so long as they believe you can sustain the losses if the investment goes south.   Under the suitability standard, the advisor is not required to consider factors such as your investment goals, risk tolerance, or the fees and commissions that the investment will generate for the advisor or the company.    Perhaps most importantly, such advisor is also not required to disclose whether there are any conflicts of interest arising from the advice that is given.    If the investment being offered to you had extraordinarily high commissions or fees, or if the successful sale of the product would qualify the advisor to an all-expense paid trip to the Caribbean, wouldn’t this be information that you would want to know in deciding whether to invest?

Beginning in 2016, the DOL began the process of implementing regulations that would have required all advisors making recommendations for IRAs (not just RIAs) to operate under the fiduciary standard (Note this rule only applied to IRAs and not investment accounts generally).   The decision was met with considerable opposition from within the financial services industry and there are several major cases pending on the issue in addition to the case in Dallas.  Major institutional players like MetLife, Edward Jones, AIG and Merrill Lynch began making changes to the types of financial products and services that they offered in anticipation of implementation of this rule (What?  You mean some of their products they sold were not in my best interest??).  However, with this recent decision by the 5th Circuit Court in Texas, it is unclear what will become of this movement towards implementing a fiduciary standard for all advisors in the financial services industry.

The takeaway from this turn of events is that is your responsibility to understand the role and relationships you have with your financial advisors.  You should not merely assume, for example from their title, or their experience, or because you have a long time relationship with the company they work for, that your advisor has your best interests in mind when making a recommendation for an investment.  This is not to say that you should never work with, for example, a commission based insurance salesperson or securities broker as there certainly are instances where investing in particular product may be advantageous and there are certainly investors who would rather pay a 1 time commission rather than be on a continuous fee based structure.  What is important is to have as much information as you can get about the investment, as well as the advisor, in order to make an informed decision about the investment.  Some of the issues that you should understand include the following:

  1. What type of licenses or certifications to they have? This type of information can be typically found by researching online such as using FINRA’s broker check and while you are there, check to see if the advisor has a “Form ADV” on file.  Form ADV is a form that Investment Advisors are required to file with the SEC and has information on the history (or lack thereof) of the advisor.  For insurance products, is the advisor licensed by the state?   If the advisor claims they have a certification, contact the agency providing the certification to verify.   Don’t be persuaded merely by fancy titles.
  2. How is the advisor compensated? Are they paid a fee only and therefore they have no particular financial incentive to sell you any product, or is their compensation dependent on the product that they sell to you?  If the latter, then most likely they can only offer the products that their company offers which may have high fees, high commissions, and may not be what is right to achieve your financial goals.  They should be providing you this information about their compensation in writing.
  3. Understand the product or service you are buying and read the fine print. You should never invest in a product that you don’t understand and if you find that the details are hard to decipher, get help!  As with any professional advice, it is usually a good idea to get a second opinion.

Although the DOL’s defeat at the 5th Circuit Court of Appeals in Dallas could signal the end of the movement to expand the fiduciary rule in the financial services industry, you can protect yourself regardless of what the DOL, Congress, or the courts do by understanding the rules and choosing your investments and investment advisor carefully.

Who Should be the Beneficiary of Your Life Insurance?

March 13, 2018 Estate Planning, Law, Retirement Planning, Uncategorized Comments Off on Who Should be the Beneficiary of Your Life Insurance?

Life insurance is an integral part of financial and estate planning for many.   In most cases, people purchase life insurance in order to protect their spouse, children, and/or others who are financially dependent on them from becoming indigent in the event they die. However, we often have questions as to how they should list their beneficiary designations on life insurance; should the individual you wish to protect be named directly as a beneficiary, or should you name your trust as the beneficiary of the policy?

In the context of retirement plans, we usually want the spouse to be directly named as a beneficiary, but the same rule does not necessarily apply to life insurance as it depends on your circumstances and goals. In determining how to designate your beneficiaries for life insurance, the fundamental questions are who are the people you trying to protect, and would it provide more protection to have those life insurance proceeds pass according to the rules and conditions set forth in your trust.

The reason for naming a trust as the primary beneficiary is that, upon your death, the life insurance proceeds would be payable to your trust, and subject to the rules of your trust. This can be very beneficial if you want to place conditions and restrictions on the distribution of life insurance proceeds. On the other hand, if you name an individual directly as the beneficiary of your life insurance policy, then upon your death, that individual receives the entire proceeds of the life insurance payout without conditions or restrictions.   In many cases, naming the trust as the beneficiary provides significantly more planning opportunities. For example:

  • Minor Beneficiaries.   If the primary beneficiaries you wish to protect are minors. Life insurance companies will generally not pay life insurance proceeds to minors. Moreover, if a minor is the named beneficiary on the life insurance policy, a guardian would most likely have to be appointed by the court following the death your death to manage the payout.   This not only entails additional delay and legal expense, but you may disagree with who the court would appoint as the guardian, as well as the underlying laws that would govern how this guardian will manage this financial windfall for the minor?   Having a well-designed estate plan gives you this control to actually name the guardians you wish to be appointed, and to specify how you wish this financial windfall to be managed or distributed for the minor’s benefit.
  • Beneficiaries with Special Needs. If the primary beneficiaries have special needs, are disabled and/or receive government benefits, getting a huge windfall from a life insurance policy could jeopardize their eligibility for government benefits. In these situations, it is usually better to have the insurance proceeds paid to a trust that can take into account these special needs so that the insurance proceeds can serve as a resource for individual(s) with special needs, yet preserve their eligibility for government benefits.
  • Financially irresponsible beneficiaries.   One of the primary benefits of using a trust for estate planning is the ability to determine how, when, and on what conditions a distribution can be made to the beneficiary. If the individual(s) you are trying to protect is not financially responsible or is a spendthrift, then, for example, you can restrict distributions to be used only for the health, maintenance, or education for the beneficiary, or condition distributions to the beneficiary only if he/she meet certain goals you wish to see the beneficiary achieve, such as education, career or rehabilitation.
  • Multiple Beneficiaries. Naming a trust as beneficiary is also useful if there are multiple individuals you wish to share the proceeds from life insurance, for example, if you have multiple children. On the other hand, if you only have single beneficiary you wish to protect and you have no issues with leaving them the proceeds outright, then it may be okay to name them as the primary beneficiary. Regardless, you should always consider naming other beneficiaries, for example, your trust, other relatives, or charities as secondary or contingent beneficiaries in case the primary beneficiary predeceases you.

For a summary regarding several other benefits of a Revocable Living Trust, here is a video from the senior partner of our firm, Mark J. Kohler:

Finally, a word on life insurance and asset protection. Every state and the District of Columbia has varying exemptions that protect the death benefit and/or cash value of life insurance. Some states like Florida and Texas have strong blanket protection against creditors for both the death benefit and cash value of life insurance. Other states have limitation on the exemption, for example, limiting the exemption to a specific dollar amount, limiting the exemption to that which is reasonably necessary to support the beneficiary, or limiting the exemption only to certain designated beneficiaries (e.g. spouses and/or children).

If protecting your life insurance from creditors is important, then you need to know the different exemptions that apply in your state and/or consider whether it is advantageous to move to a state that has better exemptions.   Better yet, if asset protection or estate taxes (either federal or state) are an issue, then you may want to consider the additional benefits of a properly structured irrevocable life insurance trust (ILIT). A discussion of ILITs is beyond the scope of this article, but if asset protection for life insurance is a goal, you need to make sure you explore this option BEFORE the need arises in order to avoid fraudulent transfer issues.

For many families, life insurance is a significant, if not largest asset in the family estate. Making sure you understand your purposes and/or options with respect to handling your life insurance will help ensure your loved ones are protected in the event of your passing.

Making the Most From Your Home Inspection

January 30, 2018 Real Estate Comments Off on Making the Most From Your Home Inspection

One of the most important due diligence items for buyers of real estate is the home inspection. Whether you plan to live in the home or whether you plan to hold it as a rental, it’s a big investment and one you want to make sure you’re not overpaying for or that you’re inheriting problems and unknown costs for. In most purchases, buyers have very little opportunity to familiarize themselves with the “in’s and outs” of a property before they commit to the purchase, and so the home inspection presents a critical and often times the only opportunity to gain real knowledge about the condition of the property before committing to the purchase.  Most people would not consider buying a used car without having it inspected by a professional mechanic, and so having a professional inspection done as early on in the purchasing process will help reduce the risk that an unknown defect will get by, give you some valuable information about the details of the home on its systems, and perhaps give the buyer crucial information needed to further negotiate the terms of the purchase before close of escrow.   As such, home inspections can be the most important step in the home-buying process and so these tips will help ensure that you get the most you can out of a home inspection.

1. Do your own inspection beforehand.   An inspection is not only about uncovering defects, but also learning more about the property and its systems.   A qualified home inspector with the training and experience of inspecting hundreds of homes will usually have valuable insight about the property that even the most seasoned real estate investor might overlook.  However, the day of the inspection is usually a whirlwind and so taking the time and opportunity to inspect the property on YOUR time and at YOUR pace without the seller present before the inspection will allow you to formulate questions and create a checklist that you can cover with the inspector on the day of inspection.   As discussed, below, being actively involved in the inspection process and asking many questions to your inspector is key to get the most you’re your inspection.  There are home inspection checklists available online including, at the time of this writing, from, Zillow, Homeinspector, org,, etc. which can provide areas which are usually part of the inspection.

2. Schedule the inspection as soon as possible after acceptance. A home inspection is usually limited to a visual inspection of the property and testing of its systems.  It usually does not include any inspection that is invasive.  Usually the home inspector will not be an expert in every aspect of a home, and will frequently recommend certain questionable items such as plumbing, heating, air-conditioning, etc. to be inspected by an expert specialist.  Give yourself enough time before your contingency period ends in case you do need to schedule an additional inspection from a specialist or if you need to research the costs involved in repairing a particular defect so that you can be armed with this information if you need to ask for concessions from the seller.   Make sure the electricity, gas, and water are all on for the inspection so you can fully test all the systems.

3. Use a Duly Licensed or Certified Inspector and do your due diligence on the inspector. Not all states have licenses for home inspectors.   If your state licenses inspectors, then you definitely want to make sure they are properly licensed and insured.  Even if your state has a licensing requirement, you also want to check the national or state trade inspectors associations such as,, or .  Members in those associations generally agree to abide by a certain code of ethics and professionalism.  You might also want to check how long the inspector has been in business, and see if your home inspector was previously licensed in the construction industry generally.  However, don’t assume that a general contractor or engineer can do a comparable job as a licensed or certified inspector as they may not have the specific training that is required to inspect the various aspects and systems on the property.  The competence and qualifications of your inspector itself may be just as much a factor as what his/her report says when it comes to negotiating with the seller as a shrewd seller could use your inspector’s lack of qualifications against you.  Don’t necessarily rely on your realtor to recommend an inspector as your realtor may not have the same incentive to uncover hidden defects.

Let the inspector know that you will attend the inspection and will be asking questions about the inspection and property.  Again, the inspection should be an opportunity for education for you, and any inspector that discourages this is a red flag.  Ask for a sample of their inspection report before you make a decision (many inspectors have sample reports on their websites).  I’ve seen inspection reports that provide great detail about the various aspects of the property and systems right down to identifying the manufacturer of various items, providing estimates of its useful life, and other helpful details supplemented with specific pictures that illustrate the condition of the system; with specific recommendations for correcting defects or monitoring the system for future evaluation.  On the other hand, I have seen other reports that provide no detail about a particular system aside from “Heater:  Working Properly.”  Remember, the inspection report will be a prime tool for you as the buyer to negotiate with the seller, and so there needs to be sufficient explanation of any defects so that you can present these to the seller for correction or further negotiation, or so that you know what you may be looking at in terms of future maintenance or repair costs.

4. Be present at the inspection if possible.  Some buyers rely on their realtor alone to be present at the inspection, but this could be a problem as suggested above.  You, not the realtor, will ultimately be the one to deal with any problems and repairs that need to be done so ideally both you and the realtor should be present.  The realtor should only be there to add possible insight, not to supervise the inspection.   By being actively involved in the inspection, not only are you likely to learn more about the specific structure and systems in your house, but a good, experienced inspector will likely provide a lot of additional helpful information and tips regarding maintenance of your investment.  Take pictures and bring a flashlight and tape measure in case you need to take information for get additional estimates for repair.  Being actively involved in the process offers you the opportunity to ask questions from a professional that may not necessarily show up on the actual report.   For example, the report may state the A/C was functioning normal, but additional questioning may reveal that the unit is nearing the end of its useful life and that a future repair may be looming.  However, remember that the inspector is there to do a job and the typical inspection takes a few hours, so give the inspector enough space to do his/her job.

5. Follow up on Items Requiring Attention and Don’t be Cheap on Due Diligence. Being actively involved in the process has the further benefit of allowing you to discover which defects are a higher or more expensive priority than others.  Is the defect something that you can easily repair yourself or could there be a major repair or safety issue looming?  Although a home inspector may offer you a general estimate of what they believe a repair might cost, they are generally prohibited from offering a specific bid to correct the item.   Therefore, it may well be worth the extra effort and expense to get an unbiased opinion (and estimate) from a specialist which you can then use for negotiation.   Who knows what skeletons lurk behind the walls and investing a few hundred dollars now to get an expert opinion could clue you in on a major headache that may be looming, or at a minimum, give you unbiased ammo to re-negotiate the terms.

Every property, even new developments will have some defects.  A qualified, licensed (or certified) home inspector should have the requisite training and experience to investigate the various details of the home in a manner that usually cannot be accomplished by other building professionals, most of whom operate solely from minimum requirements set by the applicable building code.   Getting the most out of the inspection for your most valuable investment requires that you not only get a solid professional inspector in your corner, but that you as the buyer also take the initiative to be actively involved in the due diligence and inspection process.  No process is 100% guaranteed, but having a good procedure for your inspection will minimize the chance that something major will go by unnoticed and will likely save you hundreds or thousands in the process.

How the New GOP Tax Law Affects Owners and Investors of Real Estate

December 28, 2017 Business planning, Real Estate, Small Business, Tax Planning Comments Off on How the New GOP Tax Law Affects Owners and Investors of Real Estate

Real estate has always been a major step in achieving the American dream and so there was plenty of concern within the industry that major changes in the taxes affecting owners and investors of real estate would negatively impact the industry and the tax benefits of owning real estate.   While the final tax changes are expected to diminish the tax benefits for some owners such as:  homeowners who take out mortgages above $750K, homeowners using home equity lines of credit, or homeowners in certain markets with high state tax, the overall impact on real estate, in our opinion, is likely to be nominal.   Below is a summary of the current laws and changes to the tax laws affecting owners and investors in real estate.

State and Local Tax:

Prior Law:

Individuals who itemize their deductions can claim deductions for specific state and local taxes including real property taxes, state income taxes, and sales taxes.  Property taxes incurred in connection with a trade or business can be deducted from adjusted gross income without the need for itemizing.

New Law:

Individuals who itemize (which will likely decrease in light of the increase in standard deductions) are allowed to deduct up to $10,000 ($5,000 if married filing separately) for any combination of (1) state and local property taxes (real or personal), and (2) state and local income taxes.  Prepayments on state income taxes in 2017 for future tax years may not be deducted.

However, state, local and foreign property taxes or sales tax may be deducted when incurred in carrying on a trade or business or for the production of income (reported on Schedules C, E or F).

Conclusion:  Generally worse for Taxpayers who itemize and pay high state and local taxes.

Mortgage Interest:

Prior Law:

Individuals may deduct mortgage interest up to $1M ($500K if married filing separately) of home “acquisition indebtedness”  (secured debt to acquire, construct or improve) on their principal residence, and one other residence of the taxpayer which can include a house, condo, cooperative, mobile home, house trailer, or boat.

Individuals with Home Equity Lines of Credit (HELOCs) were allowed to deduct interest paid on up to $100K ($50K if married filing separately) of a Home Equity Line of Credit.

New Law:

For homes purchased after December 15, 2017, the deduction for 1st home mortgages would be limited to interest paid on mortgages up to $750K ($375K for married filing separate) and is not limited to only your principal residence.  For refinances, the refinanced loan will be treated the same as the original loan so long as the new refinanced loan does not exceed the amount of the refinanced indebtedness.

The deduction for interest on Home Equity Lines of Credit has been eliminated which applies retroactively.  However, the new tax law did not modify the definition of “acquisition indebtedness” and so interest on a Home Equity Line of Credit that was used to “construct or substantially improve” a qualified residence continues to be deductible.

Conclusion:  Worse for Taxpayers since the qualifying indebtedness was reduced from $1M to $750K for debts incurred after December 15, 2017, and indirectly due to the increase in standard deduction plus the elimination of deductions of home equity lines.

Depreciation of Real Estate:

Prior Law:

The cost of real estate “used in a trade or business” or “held for the production of income” must be capitalized and deductions made over time through annual depreciation deductions over 39 years (for non-residential) and 27.5 years (residential) using straight line depreciation.

Certain leasehold improvement property, qualified restaurant property and qualified retail  improvement property can be depreciated over 15 years.

New Law:

Same recovery period for residential rental real estate and non-residential.  However, the previous exceptions for qualified leasehold improvements, qualified restaurant property and qualified retail improvement have been modified and consolidated so that they each must meet the definition of a “qualified improvement property” which is then depreciated over 15 years.

Conclusion:  Nominal change

Capital Gains:

Current Law:   Capital Gains rates apply to any net gain from the sale of a Capital Asset or from Qualified Dividend Income.   Capital Gains and Qualified Dividend Income are subject to rates of 0%, 15% or 20%.  Any net adjusted capital gain that would otherwise be subject to the 10% or 15% income rate is not taxed.   Any net adjusted capital gain that would otherwise be subject to the rates between 15% to 39.6% income rate are taxed at 15%, and amounts taxed at 39.6% income tax rate are taxed at 20%.

New Law:  No change in structure, except that the income tax brackets are modified and the amounts subject to these rates will be indexed for inflation based on the Chained Consumer Price Index (C-CPI-U) beginning the end of 2017.  For 2018, the breakpoints would be as follows:

Under $77,200 (married filing jointly) or $38,600 (single) of income, no capital gains

15% Rate:            From $77,400 married filing jointly ($38,700 for single)

20% Rate:            From $479,000 married filing jointly ($425,800 for single)

Conclusion:   Generally better for investors due to the new tax brackets and indexing for inflation.

Exclusion on Gain on Sale of Personal Residence.

No change.  The rule allowing for an exclusion from capital gains in the amount of $500K married ($250K single) for sale of the personal residence used as such for two out of the last five previous years remains.

1031 Exchanges:

Current Law:  No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged for like kind which is held for productive used in a trade or business or for investment.

New Law:  For transfers after 2017, gain deferral allowed for like kind exchanges of real property only, but real estate held primarily for sale (i.e. flips) would not be eligible.   This applies to exchanges completed after December 31, 2017.  However, so long as the relinquished property is disposed of prior to December 31, 2017, the non-recognition provisions of the prior law applies.

Purchasing Homeowner’s Insurance- Strategies & Pitfalls

December 13, 2017 Asset Protection, Business planning Comments Off on Purchasing Homeowner’s Insurance- Strategies & Pitfalls

People who have read Mark Kohler’s Lawyers are Liars know that our philosophy with respect to asset protection is the “multiple barrier approaches” to put as many barriers as you can between you and someone who would sue you.  For owners of real estate, one of primary asset protection barriers is your homeowner’s insurance policy.

No insurance policy will cover all risks under any circumstance, and so it is important for owners of real estate to request, understand and procure the right policy for their situation.   Unfortunately, getting the right policy tailored your situation may not as easy as just calling your insurance agent and getting whatever they recommend, but requires a careful understanding and analysis of risks that can be protected by insurance, but most importantly making sure your policy actually covers those risks.  Your insurance agent should assist you in deciding on appropriate coverage, but remember that you, not the agent, knows this property the best and so it is your job to communicate the risks and perils on the property to the agent.   Some guidelines that can help maximize coverage include the following:

Tip 1. Make sure you are Dealing with a Licensed Insurance Company or Agent.Both Insurance Companies and Agents are generally licensed by the state and their information can be found online at the insurance department for the state.   Most state insurance departments have resources online to assist you in purchasing the right insurance and make sure that the person or company you are dealing with specializes in that specific area of insurance.

Tip 2. Understand What Type of Risks and Coverage You Need.Every property is different and may entail different risks.   The type of insurance will also depend on whether the property is used as a personal residence, long term versus short term rental, or a condo.    In general, homeowner’s insurance is designed to protect against risks that are outside the control of the owner, such as rain, wind, fire, vandalism, pipe bursting, falling objects, theft caused by breakage of glass, etc.   It generally does not cover risks that are within the control of the owner or occupier, such as flooding caused by drain stoppages, mold, toxic materials, pests, damage or injury resulting from deferred maintenance, intentional criminal acts, etc.  Flood and earthquakes generally require a separate policy. A typical homeowner’s policy will generally classify coverage for (1) Dwellings or other structures, (2) Damage to Personal Property, and (3) Liability coverage.   Knowing what you are specifically looking for in the form of coverage BEFORE you shop for insurance will help ensure that the actual coverage you buy matches your expectation.  An insurance agent will typically gather some specifics about your property and (if your lucky) also have a conversation with you regarding appropriate coverage, and based on that alone will make a recommendation of coverage most likely generated from a computer. The insurance agent will rarely have seen the property nor have any idea of any unique risks existing on the property and so it is your responsibility to discuss any unique risks on the property.

For example, for coverage for “Dwellings,” you want to know, from as reliable a source as possible, the estimated cost to repair or replace the structure with like kind and materials in the location where the property is located.  Construction costs vary depending on the location and the actual costs are often higher than what most people think.  Make sure you understand terms used by your insurance company such as the difference between “Actual Cash Value” versus “Replacement Cost” or “Guaranteed Replacement Cost,” with the understanding that insurance companies may define these differently.  For Personal Property, you want to make sure that important items of personal property are covered, how much they are actually worth, and create an inventory or snapshot of your personal property.

Most people are unaware that homeowner’s policies also provide coverage for personal (not business) liabilities that occur outside of the home.  For Liability Coverage, especially for rentals, you need to be very precise as to what your expectations in terms of what are the most horrible things that could cause significant injuries on the property what the appropriate amount of coverage would be.    Create a list of all the risks and perils that are important for the property (e.g. pools, dogs, trees, neighbors???) so that you can address these with the insurance agent.   Also, understand or ask how the deductible amount or other discounts such as alarms or other safety features will impact the premiums.   Consider what the differences in premiums would be if you increased the coverage especially if you have higher net worth as the premium increase for added coverage may not be as much as you think.   Look online for tips from state insurance departments websites such as, or consumer-oriented websites like   for issues and topics that can help you understand what risks and perils you should be aware.

For condos or other common interest developments, there is often a master HOA policy from the homeowner’s association which generally covers the common walls, areas, and roof.  There may be separate policies for earthquake and flood.  Obtain copies of these policies and consider contacting the insurance agent to inquire about any gaps in coverage. The master HOA policy typically does not cover your interior condo unit and so a separate HO-6 is recommended to cover risks occurring from the “walls in.”  Since condo units often have shared walls, make sure you understand how risks occurring in these shared walls, in particular, water damage will be covered as this type of damage is often tricky to determine who should be responsible in the event of a loss.

For landlords (whether long term or short term), there are different policies depending on the use of the property and so make sure you get the proper policy for your specific use of the property. If you change the use of the property, for example, a personal residence to a long term rental, or into a short term rental, you’ll need to get a different policy to cover the different risks involved with the different use of the property.

Tip 3. Keep Detailed Notes of Your Communications with Insurance Representatives and Confirm, Confirm, Confirm. Although the nature of the relationship between the insurance agent and insured could vary depending on laws of the state and whether they are working for the insurance company or an insurance “broker,” you want to be very clear with your insurance representative as to what coverage is important to you, and any specific requests or expectations of coverage should be made or confirmed in writing to the insurance representative.  Ask and confirm with the agent in writing any specific exclusions from the policy.  In other words, if the agent makes a representation of coverage to you that is important, send a confirmation of that representation in writing (e.g. email, fax, etc.) so that a record exists confirming your expectations.  Better yet, ask the agent for a copy of the policy beforehand.  Most agents won’t volunteer this but any agent that has been doing this for any amount of time should have this handy.   Keep copies of everything, including advertisements and marketing as that information could be relevant in a coverage dispute.   If you’re not sure about the type or amount of coverage you need, ask the insurance agent for their opinion and confirm this opinion in writing.  An insurance agent who makes a representation to you concerning coverage could be bound by that representation even if it doesn’t appear in the policy so it is important to document all communications with the agent to hold them accountable for what they say.

Tip 4. Read Your Policy. I’m not talking about the 1-2 page “Declarations Page” that is only designed to show proof of coverage, but 20-30 page insurance “Binder” or “Policy” that contains the details of the actual coverage and exclusions.  No one really enjoys reading insurance policies and don’t be surprised or embarrassed if you don’t understand what you are reading.  It is a well known fact that insurance companies intentionally make their policy language difficult so as to create ambiguities as to their coverage responsibility.    Nevertheless, don’t let the first time you read the policy to be when you need to file claim.   Get ahead of it beforehand which will give you the perfect opportunity to ask questions and to clarify coverage with the insurance agent before a claim arises (See #2 above).   Be assured that if a claim is ever made, the adjusters and defense attorneys will be combing through the policy language with a fine toothed comb to try and evade responsibility.   If you do ask questions about the policy language, don’t be surprised if the insurance agent initially doesn’t understand what the policy says either as that is quite often the case, but make sure you get an answer to your questions in writing.

Tip 5. Coverage for an LLC.For those of you who own rental property in an LLC, check with your insurance agent as to what they would require to add the LLC as an additional insured.  Some companies will simply add the LLC as an additional insured in addition to the owners.  If your insurance agent tries to sell you a different policy such as a commercial policy, consider getting a second opinion, and again, do not rely merely on the verbal assurances of your agent, but confirm it in writing.   If you have a mortgage, be aware that some lenders may periodically ask for proof of coverage, and so there are possible due on sale implications for adding an LLC as additional insured.

Getting the right insurance coverage should be one of your front line defenses in your overall asset protection strategy.  Doing your homework beforehand, exercising proper due diligence during the process, and making sure there is a paper trail of your dealings with the insurance company will help ensure that there will be coverage in the event of a loss.

Five Benefits of the Solo 401K

November 6, 2017 Retirement Planning, Tax Planning Comments Off on Five Benefits of the Solo 401K

For many Americans, saving for retirement is like exercising or eating healthy, we know we should do it but most of us don’t.   In fact, a survey published by the Washington Post reported that over 70% of Americans are not saving enough for retirement and a study by the US Government Accountability Office reported that as many as half of American households 55 or older have NO retirement savings at all!   A recent Merrill Lynch report estimates the average cost of retirement to be nearly $750,000 but this obviously depends on your standard of living and life expectancy.   With advances in technology increasing our lifespans, we need to plan accordingly in order to have what we need in retirement.

The Solo 401K is the ideal vehicle for small business owners with no full time employees to save for retirement through its generous contributions limits which can offset your taxable income.  If your small business generated a profit this year and you are looking for a nice year-end tax deduction, the Solo 401K may be the perfect solution for you.  We have compared the other available retirement options for small businesses and the Solo 401K consistently wins hands down.  Some of the benefits include:

1. Tax Savings: In 2017, the employee contribution limit is $18,000, or $24,000 if you are 50 or over.  Compare this with the contribution limit of $5,500 for IRAs.   In addition, the business itself can do an employer match up to 25% of the employee’s W-2 compensation.  For an example, let’s assume you have a net income of $100,000 in your s-corp business and you took $35,000 as your salary.  Your contributions (traditional) and tax savings are as follows.

Employee traditional 401K Contribution                                 <$18,000>

Employer Match at 25% of $35K                                                <$8,750>

Total Solo K Contributions                                                            $26,750


Tax Savings (approx. 25% federal):                                           $6,700 (approx.)

Plus State Income Tax Savings Depending on State

For a calculator that allows you to determine your contribution levels based on your income, refer to this website, check your business entity type (sole prop LLC, partnership, s-corp) and it will calculate the solo K contribution amounts.

2. The Ability to Self Direct: The solo 401Ks established by KKOS  allows you to self-direct your retirement account which means, with very few exceptions, you can invest in virtually any type of investment you want.  Rather than be stuck with the investment options that Merrill Lynch or Charles Schwab offers, with a self directed 401K, you can invest in “what you know.”    Do you want to be a lender and get a fixed rate of interest through your 401K?  Or perhaps purchase a rental property if your interest is real estate?  Maybe a startup company in an industry you have an interest.  All of these options are possible with a self directed 401K.

3. No Third Party Custodian: By contrast to an IRA which requires a third party custodian, the 401K owner in a solo 401K can acts as his/her own trustee.  The other options to self-direct is through a self-directed IRA, however, in a self-directed IRA (without an IRA/LLC) all of your transactions needs to be processed through the third party IRA custodian.  Some clients have reported that they were unable to secure a deal due to the delays of having to go through the third party custodian.  On the other hand, with a solo 401K, you, as the trustee of the 401K, have the freedom enter into transactions or make investments on behalf of the 401K thereby eliminating the expense and delay of involving a third party custodian.  You’ll also have a checking account and “checkbook control” such that you can sign checks or send wires to make investments or to pay expenses. With freedom, of course, comes responsibility and so you must be intimately familiar with the rules and restrictions for self directing your 401K to avoid penalties and taxes with the IRS.

4. You can take a Personal Loan from your 401K: With an IRA, there are  very limited circumstances where you can use money from the retirement account for personal reasons and because of these restrictions, using IRA money for personal purposes is not a viable option.  With a 401K, you can take a loan of up to $50,000 or 50% of the value of the 401K, whichever is less, and use those funds for any purpose.   401K loans must be in writing using a compliant 401(k) participant loan note and, must provide for, at a minimum, quarterly repayments within five (5) years.  However, for individuals who need quick access to cash, the 401K loan is usually a much better options compared with those available for IRAs.

5. No UDFI Tax:   When you leverage your investment in an IRA with borrowed funds, any income that is received that is attributable to those leveraged funds is subject to Unrelated Debt Financed Income Tax (UDFI).   For example, if you buy a $100,000 rental property through your IRA, but 50% of the purchase price was from a non-recourse loan, 50% of any income from that investment will be subject to this UDFI tax.    By contrast, there is no UDFI tax for 401K investments arising from debt on real estate.   So any income you generate from that $100,000 property in your 401K would grow tax deferred even though you only really used $50,000 of retirement funds to generate the income.   That’s having your cake and eating it too!

In order to qualify for a solo 401K, you must have a small business that generates business income (sorry, rental properties alone generally do not qualify as a small business).   The 401K must be established before the end of this year in order to obtain the tax benefits for this year.   For those business owners who are looking for year-end tax strategies to lower your taxes, the solo 401K may be the perfect fit.

For more information on how the Solo 401K works, take a look at our 1 hour solo 401K webinar available here.

Creative Planning Options with a Revocable Living Trust

October 17, 2017 Business planning, Estate Planning, Uncategorized Comments Off on Creative Planning Options with a Revocable Living Trust

Estate planning is something most know they should do, but most American adults simply haven’t gotten it done.  In a survey available from AARP,  60% of American adults do not have an estate plan.  The number gets even higher for some minority populations.  In most cases, this is simply due to procrastination that “I just haven’t gotten around to it.”  Many people that I speak to as a lawyer simply don’t understand the consequences of passing away without an estate plan.

One of the primary reasons for a Trust is to avoid probate, which is a court supervised process for the distribution of a decedent’s assets (especially real estate) when a person dies without a trust.  However, the revocable living trust affords many creative planning opportunities that generally cannot be accomplished without a comprehensive estate plan.  Many individuals who have not consulted with a professional estate planner do not know the creative strategies that can be accomplished through a trust.  Examples of some creative planning opportunities include:

Planning for the Disabled

In general, eligibility for certain need based government benefits such as disability or SSI have restrictions based on income and assets.    Many people mistakenly assume that if they have a child or other dependent that is disabled or who otherwise relies on government benefits, that they should disinherit these disabled dependents in order to ensure that the dependents continue to qualify for disability benefits.  Disinheriting a dependent entirely just so they can continue to get disability represents a fundamental misunderstanding of the available options and often times simply indicates bad planning.  A “special needs trust” is a special type of trust that can allow a dependent to potentially receive funds and benefits from the trust without interfering with government benefits.    These types of trusts require very precise terms and conditions so that any benefits from the trust do not disqualify the dependent’s eligibility for the particular government benefit to which the dependent is or may be eligible.

Asset Protection for the Beneficiaries (Your Kids/Heirs)

A trust can provide significant asset protection for children who have difficulties handling money or who are otherwise high risk.  Most states allow trusts to contain “spendthrift” provisions which can restrict the ability of creditors of the beneficiary from reaching the beneficiary’s interest in the trust.  In general, a creditor can only reach assets from a debtor which the debtor himself/herself can reach.  Different states may have different rules and there may be exceptions for certain types of creditors (for example, claims by a spouse for alimony or child support may not be protected by a spendthrift clause).  In addition, the protection of the spendthrift provision general applies only to the beneficiary, not the original creator (i.e. the grantor) of the trust.  However, the spendthrift provision could be an effective planning tool to provide for your beneficiary without risking that the trust could be subject to that beneficiary’s creditors.

Planning for Blended or Non-traditional Families

Lets face it, our conception of the family unit from generations ago is constantly changing and evolving.   Many of us are now raised in blended families, or by individuals who were not our blood parents, or live in various types of family arrangements.  In most cases, the law has not evolved in recognition of these different family arrangements.   A primary purpose of the revocable living trust is to dictate how your loved ones will share in your legacy.  With a Trust, you can help ensure that certain individuals do (or don’t) share in your legacy.    Otherwise, leaving this decision up to the laws of the state could result in people you care for being cut off from your estate.   The most common example is someone who divorces and remarries but has children from the original marriage.  In many states, if that person passes without an estate plan (will or trust), the estate passes to the surviving spouse and the children from the first marriage are cut off.   Proper planning using the revocable living trust will help ensure that the people you wish to benefit will actually receive those benefits.

Planning and Supporting a Legacy

A trust is a very flexible document and can be drafted in different ways to support the ones you love but not allow the assets to be wasted.  Do you want to provide support to a grandchild, but not have it affect their eligibility for financial aide for college?  Do you want to help a child start a business, but not unless he/she first gets a college degree?   Do you want to assist your children to buy their first home, or finance their wedding?  A revocable living trust allows you to set terms and conditions for your generosity to ensure that your gift is used the way you wanted it to be used, and for nothing else.

Of course if you’re one of those people who feel that “I can’t take it with me so I’m going to spend it all now,” then perhaps these planning opportunities are not for you.  But for those who wish to leave a legacy behind for your loved ones (or loved causes) future and want it protected and preserved for this purpose, the revocable living trust can provide infinite possibilities to secure your legacy.

Til Death Do Us Part – Marriage and Asset Protection

August 15, 2017 Asset Protection Comments Off on Til Death Do Us Part – Marriage and Asset Protection

The question of whether a spouse can be held liable for the debts of the other spouse is often asked from married  (or to be married) couples, but the answer is not uniform and depends largely on  the laws of the state where you reside.


The large majority of states that are NOT one of the nine “community property” states discussed below operate under the “common law” system, derived from Great Britain.  In these common law states, the liabilities of married couples are generally determined under the “title” theory, meaning whichever spouse is on title for the asset owns the asset, and whichever spouse was responsible for incurring the debt is solely responsible for that debt.  Spouses in common law states are generally not jointly liable for debts unless they both are involved in procuring the debt as a “joint debt.”  As a result, if a married individual in a common law state alone incurs a debt, the creditor would generally be limited to recovering from that individual’s assets only, and no recovery could be made from assets titled in the name of that individual’s spouse.   On the surface, this would encourage married couples to segregate their finances so that valuable assets are held in the name of the spouse with lessor risk, and corresponding debts in the name of the spouse with higher risk.  However, these rules are very state specific and, of course, moving your assets around when a creditor is already on the horizon raises fraudulent conveyance concerns, and so any asset protection planning should be done before the need arises.

Some common law states create an exception to the “title” rule for debts that are deemed for “necessities” or for “family expenses.”  In those states, spouses may be jointly liable for debts that are necessary for the family such as education, household, or medical debt even if the debt was obtained by one spouse only.   States also vary in how broadly they define debts deemed to be “necessities” or for “family expenses,”  and so it is important to understand how your state defines these terms to understand under what circumstances a creditor can attach the assets of a both spouses for the debts of only one.  Other states impose joint liability if the liability was created when a spouse was deemed to be acting as an agent of the other spouse, and so anyone concerned about spousal liability would need to familiarize themselves with the rules unique to their state.


In states that recognize “tenancy by the entireties,” assets owned jointly by the spouses as “tenants by the entireties” are deemed to be owned by the couple as a whole, and not owned by each spouse individually.   In these jurisdictions, a creditor of one spouse is generally unable to attach property owned “by the entireties” unless the other spouse also joined in the creation of the debt.   Therefore married couples in states that allow “tenancy by the entireties” often hold valuable real estate in this manner which can provide effective asset protection against creditors of just one of the spouses.   Again, these rules are not uniform as some states may find that a debt entered into by one spouse is nevertheless a joint debt if the non-debtor spouses knows, benefits, consents or ratifies the debt.


In the nine community property states (CA, AZ, TX, WA, ID, NV, NM, WI, and LA) which derives their marital property law from the Spanish system, each spouse in a marriage is deemed to own a ½ interest in assets that are deemed community property.  Since each spouse has a half-interest their individual debts could be attached and satisfied by a creditor against their 1/2 interest.  Therefore, by contrast to the common law system which relies heavily on “title,” the key component in community property states is not who owns the property, but how the property is characterized.   For these reasons, experts generally agree that community property states are more creditor friendly than their common law counterparts.  For example, assume a couple consisting of a primary wage earner and a homemaker.  The wage earner purchases a house during marriage using wages from employment, and takes title in the wage earner’s name only.  The homemaker then gets into a car accident which is not fully covered by insurance.  The resulting liabilities would obviously depend on the specific state but generally, in a common law state, the house could be protected from the homemaker’s liabilities because title is held in the wage earner’s name only, whereas in a community property state, ½ of the house could be exposed because the property would likely be deemed community property which the homemaker owns a ½ interest.   Therefore, marriage in a community property state could effectively expand the potential assets that creditors of either spouse can reach to the extent a married couple acquires assets characterized as community property.

Since exposure of assets in community property states depends on characterization, there is an incentive for married residents in community property states to consider marital property agreements that alter the characterization of assets (i.e. pre-nuptial or post-nuptial agreements).   The procedural requirements to form an enforceable marital property agreement, and the extent to which such agreement will protect your assets will depend on the laws of the state.  Therefore, consulting with an expert who understands these nuances in the respective state is essential to ensure that any asset protection goals are maximized.

Any married individual concerned about asset protection would be well served to understand the specific rules in your state governing the exposure of your assets to creditors, what tools exist in your state to mitigate your exposure to spousal liability, and how to utilize these tools in a manner that maximizes your protection in the event of an unforeseen liability.   Most important is the need to engage in this planning before it is actually needed as any planning done when a creditor is already in the fray may be vulnerable to attack as a fraudulent conveyance.

Legal Tips for Wholesaling Real Estate

July 18, 2017 Business planning, Real Estate Comments Off on Legal Tips for Wholesaling Real Estate

Many real estate investors regard wholesaling as a way to learn how to evaluate deals and develop your real estate network.  It is also a method to profit from investing in real estate without requiring significant up front capital.  Wholesaling is a strategy whereby the wholesaler enters into a purchase contract with a seller of real estate and then assigns the purchase contract to another third party who will typically rehab the property and flip it for a profit (at least that is the goal).

Although most investors regard wholesaling as involving less risk than, for example, the flipper who is rehabbing and selling the property, there are always risks in any transaction, and so the purpose of this article is to identify some of the common legal issues to look out for in your wholesale deals.  This article is not designed to teach you the strategies for being a successful wholesaler, such as how to find properties, how to approaching homeowners, etc., but instead, focuses on some of the legal aspects of wholesaling that investors should be aware.

Licensing Issues:  Be aware of potential licensing requirements for your state:  Different states define the scope of activities that require a license differently and so you should be aware of what activities are regulated by your particular state and act accordingly.  For example, California generally defines a real estate broker as someone who sells, buys or negotiates for another with the expectation of compensation.  If your activities in California meet these elements, then be advised that you may need to be licensed as real estate agent.   Any questions regarding state licensing requirements should be directed to an attorney with knowledge of the requirements of that state.


Understand the Rules & Procedures Governing Real Estate Transactions in your State:  Many states have unique laws, forms or disclosure requirements for real estate purchase transactions.  For example, in California, a seller is required to provide a transfer disclosure statement and if the property is in foreclosure, there are additional required disclosure requirements.  Failure to abide by the rules that are required in your state could cause legal issues down the line in your transaction.  You don’t want to have a seller or your end buyer come back later raising an issue with the transaction that could have been avoided had you followed the proper procedures for real estate transactions in your state.


Be Transparent as to your Role in the Deal:  If your intent is to wholesale the property during escrow, the homeowner should be well aware in writing that your intent is to assign the deal to a third party for profit, and the contract language should give you a unilateral right to assign without requiring the consent of the homeowner.  Most standard form purchase agreements you get from realtors do not have this language and so an amendment or specially prepared form may be necessary.   On the buyer’s side, you should be very clear in your written agreement with the end buyer as to what you will be responsible for and what will be the responsibility of the end buyer.  For example, are you going to do an analysis of after repair value (e.g. running comps and estimating repair costs)? Run title?  Do an inspection?  What happens to your earnest money deposit once you assign the contract to the end buyer?   Your agreement should clearly specify in detail what your specific obligations are in the deal, where your obligations in the deal ends, and what the end buyer is expected to do to close the deal.  It is better to have these details on who does what expressed clearly in writing rather than rely on assumption.    Most importantly, you should include language that fully releases you from any further obligations or liabilities in the deal to ALL parties once you complete the assignment to end buyer.


Make Sure Your Contingencies are Clear.  This should go without saying, but depending on the specifics of the particular deal, it is important to properly set the expectations early for all the parties involved.   I typically advise clients who wholesale properties to have a good understanding of what their potential end buyers want in a deal in terms of location, spread, contract language, due diligence items, etc.  I also encourage individuals wanting to pursue wholesaling to develop relationships with rehabbers as early as possible, preferably before getting a property under contract, so that they have a good idea of whether they will be able to successfully complete the assignment as intended.    It is highly recommended to have your team of professionals such as realtors, contractors, appraisers, etc. in place to provide accurate feedback as you analyze the merits of your deal.  Finally, have an attorney’s fees clause in your agreements so if you have to pursue legal action to enforce the agreement or your contingency clause, you preserve the right to seek your attorney’s fees.

Of course, making sure you are covering yourself legally is just one detail for successful wholesaling.  Finding the right properties, learning to negotiate with homeowners, and developing a network of professionals to assist you during the wholesaling process are all necessary aspects for successful wholesaling, but making sure that you are covering your bases legally will help ensure that your wholesale deals proceed smoothly with minimal possibility for conflict.