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So, it's not enough to just have an inheritance plan or some kind of plan, you need to create a plan specifically for yourself. The more complicated the situation, the more pieces of the puzzle, the greater the wealth, the more often problems arise with taxes: income, inheritance, or property. And the more complex the assets and their distribution can be.
I am very pleased to welcome today Connor Inlow, an attorney at TLD Law. Connor, thanks for joining us again. Thank you, Bill. Thank you for inviting me. Nice to see you. And most importantly, greet him as a fellow Trojan: "Fight on !" And also about my law school studies at Loyola, where I was once on the LMU swimming team.
So we have common geography at least. Yes, "fight on!". So, let's talk a little about real estate. I think that when planning an inheritance, it's one thing to say, "I want to give everything to this person, that person, etc." But there are also tax implications of exactly how you transfer it. I know a common case: they want to divide a property into three, but giving a share of ownership to three different parties can create unpredictable tax consequences.
So let's talk about the impact of taxes on property when it is distributed. How can you avoid unnecessary taxes or what to do when it has already happened and the situation has arisen? Yes. Yes, this is a big problem. We see this all the time in our estate planning department: clients come in with huge additional tax bills and want to know how to fix it.
So, you know, this is going to sound presumptuous, but I would advise consulting with an attorney or tax advisor before removing someone from a property or putting someone in there. A common problem we see is people trying to do estate planning outside of their trust. You know, they want to do it early.
They want to gift real estate or add their children to the ownership. And you know, Proposition 19 is one of the few ways to transfer property without a complete revaluation, but it has very strict deadlines and obligations. So, unless it is the primary residence of both the transferor and one of the children— or grandchildren in exceptional cases who make it their primary residence for a year—you won't get it.
All of this must be submitted with proper documents within 3 years. If you have not moved within a year to make this property your primary residence, this may be denied. So, in short, attempting early estate planning can result in a complete reassessment of your estate taxes and deprive you of the benefits of Proposition 19.
Furthermore, not only are you forced to pay those estate taxes while you own the property, but you also won't get the full increase in basis for capital gains taxes that would have occurred upon the owner's death. Therefore, trusts are always better, and it is worth consulting with lawyers to choose the best tax avoidance strategies, because independent actions can create problems that are difficult to fix.
You mentioned what to do if this has already happened: you can contact an attorney if you fall under an exception or exemption from reassessment. Lawyers can help you prepare documents to apply for these benefits. If you do not fall under any of these, the only option is a so-called act of annulment, although it is not always accepted.
They must be filed within a reasonable time, but you can cancel the deal even if the reason is only that you made a mistake and overvalued your property. We did n't want this. This doesn't always work if it's not done on time, plus it's expensive and takes a long time to fix because the assessor's office is lined up and they can't fix everything quickly, so you might end up paying a few higher bills.
A common case is this : a mother is sick, afraid, so she registers her eldest son or daughter as the owner, and she lives for another 5 or 6 years. During this time, the value of the property increases, perhaps by $200,000. Now a few things are happening. First, when they sell the property, the son has to pay taxes from the time he becomes the owner.
Now it is considered their profit. Although , as you noted, if you wait until death, you get an automatic tax-free increase in your base. But they have already received the property, so this increase in the base does not apply to them . Also, the revaluation of property is simply terrible, because the district could return to the past; I had a client who had their taxes reviewed for 13 years.
It was a huge amount of money. I mean , the amount they ended up owing was just staggering. Yes, the tax inspector can review past periods. It's usually about 5 years, but if they believe there was fraud or intentional misfiling , they can go back for as long as they want. So yes, to your question, if the inspector acts aggressively, he can assess additional taxes for 5, 10, 13 years, and it is almost impossible to find the liquid funds to pay it all.
That is, you actually have to take out loans to make a lump sum payment, and if you don't pay on time, they charge penalties, the situation only gets worse, and they can seize your property or accounts. So it could end up in foreclosure if you're not careful, it's a real nightmare. Another problem I often see when transferring real estate is the use of joint tenancy.
There are cases where joint tenancy is appropriate, but recording siblings as co-owners does not always correspond to the family's intentions, as it all depends on who outlives whom, and this can lead to, for example, one of five siblings receiving all the property, while the descendants of the other four are left with nothing and without any rights, which was hardly intended; In addition, the termination of a joint tenancy triggers a revaluation of the property, so it is difficult to cancel it without a revaluation and transfer the property to a trust.
That means you have to break the joint tenancy, and that only creates problems. So before using a joint tenancy, I advise consulting with a professional, because I see it creating more hassle than expected and the parties not realizing the implications of a joint tenancy for both property taxes and estate planning.
Yes, I think I know that. If you own a property and you own it in joint tenancy, and then you say to your partner, " Okay, I don't want to be a co-owner anymore." I will make both sole and separate ownership. This leads to overestimation. Yes, I want to be clear. There are many exceptions to this rule, but in general: the creation or termination of a joint tenancy results in a revaluation.
So, if you do not fall under the exception and can prove it, know that the evaluation committee does not have time to study the details of each submitted act, so they quickly re-evaluate. And therefore, True. there are difficulties. I think I had a client who confirmed: the county believes that every change of ownership results in a reassessment, and sends a notice for you to appeal it, and there is a specific deadline by which to do so.
And if you think about it, that's stupid for two reasons. First: I know this shouldn't require action, because I have an exception. Second: I filled out the form then , so I don't need to do anything. Well, doing nothing is a mistake, right? So what should a person do when they receive a reassessment notice if they : A—believe they have a valid exception; or B—filled out a change of ownership form when the deed was registered, but Los Angeles County hasn't even reviewed the form yet.
Yes, that's a great question. This is a problem we constantly face. So, we can give two fairly simple examples. Transferring your property into a trust, if you are a current beneficiary of a revocable trust, does not result in a revaluation under tax law. Likewise, if you transfer ownership to an LLC, but you are the sole owner of that LLC, it will not result in a revaluation.
But you can fill out a preliminary report on the change of ownership and mark the item about the proportional transfer to a business entity or transfer to your revocable trust; you would think that would be enough, but we see that typically the assessment board will send a letter to the taxpayer saying, "We need a full copy of the trust or a signed operating agreement." And if that request for additional information isn't answered in a timely manner, they will completely re-evaluate and just wait for you to contact them to make things right.
So, I would recommend doing two things: first, you can add supporting documents to the “Preliminary Change of Ownership Report,” which we sometimes do —for example, we add a trust agreement or an operating agreement and provide them in advance; and secondly, just keep a close eye on any messages from the appraiser's office.
You know, I think we all have this problem—we don't check our email very carefully. We may be getting a lot of spam, but if it's an email from the appraiser's office, you should read it very carefully. And if you have any questions, it's worth reaching out to someone who can help you understand everything, because sometimes you just need to give them the information they're asking for.
But if you throw this message away and do nothing, you will receive an additional tax bill in the next letter, and that will be very painful. Yes, there's nothing good about it, and again , there are times when customers call in angry and you have to explain, "Well, that's how the county works, but you still have to protect yourself." It's one thing to say, "Oh, they're bad, but I did everything right." Okay, you may be right in your opinion, but as one of my first coaches told me: " You can be right or rich, but not both." And he's right, because even if you're right, when you get letters like this, you need to take appropriate steps to protect yourself, because the county assessor doesn't joke around.
They will get their money if they can. They will get their way, so you need to do everything possible to deprive them of leverage. Yes, of course, I completely agree. I mean, clients complain to me all the time about the appraiser's office, and since I work with them every day, I can understand them, but you know , they have a tough job .
I don't know the exact numbers. I don't know how many deeds are filed every day in Los Angeles County, but there are too many for them to go into every detail about who the parties to the transaction are every time. They don't have the time, money, or resources to do this, and they get more if they re- evaluate.
Therefore, it is the taxpayer who must prove each time why he meets certain exclusion criteria , otherwise a reassessment should be expected . I have to say that having worked with real estate in different counties, I find that Los Angeles County does very well, about 99% of the time , considering the sheer volume.
I think we have better resources, information, systems, and procedures than most counties; Because of our size, we can be more balanced. But when something goes wrong, the work required to get everything back on track and fix the problem seems impossible. There is no, there is no other solution than to do the hard work to get everything back on track, I believe.
Yes, you just have to be persistent. You know, you should make their job easier, that's how I look at it , because they... If you can explain everything to them in clear, concise and simple language, send only the necessary documents and put everything on the shelves, then they, as a rule... they always cancel the decision if you can prove that you were entitled to something.
But this ...it is the taxpayer's duty to provide such evidence. That's it. Another area in which I know you work quite a bit is business continuity planning and business succession management . You know, as a real estate agent in probate cases, I often encounter situations where the deceased were partners in the ownership of the property, and the other partner doesn't want to do what the heirs want.
I am not a party to the dispute, I am an agent hired directly by the heirs to sell the property. And my partner calls me and says, "Well, you know, that's what he always wanted to do. " And I have to politely respond in essence: " I'm sorry, but that person has already passed away." And now, you know, you have an agreement that regulates this.
And this agreement says that we must go through this very process . And they hired me to sell this property. And I'm sorry, but that's how it works. You could have made a different agreement, but you signed this one . So tell us a little bit about succession planning and how it works in business and real estate.
After all, the plan that works best while both partners are alive may not be the best when one of them is gone. Your task is to try to make a deal that takes into account both of these realities, but you cannot choose just one, as the choice will be yours. Yes. Yes, that's a great question. And I'm sure you know that many businesses or real estate properties are organized as separate legal entities or LLCs.
So they often overlap, and the same best practices apply to them. Even if you don't own them through a legal entity, you can enter into a joint ownership agreement that allows for many elements of what I would call not so much estate planning as business succession planning, which applies to both cases.
There are actually three main types of agreements. There are agreements for the purchase and sale of shares, if it is a corporation; we can discuss this if you want, but I mostly don't advise owning real estate through a corporation, an LLC is usually better from a tax perspective. However, for succession planning in business, a stock purchase and sale agreement or shareholder agreement is used, where you define certain trigger events.
Certain events trigger redemption mechanisms, and you can clearly specify the share valuation, valuation date, and payment terms and procedures. The most common way is to include events such as death, incapacity, or dismissal from the business —any condition that you and your partners deem appropriate will trigger a redemption mechanism that will allow the funds to be paid out.
To pay heirs so that the deceased person does not lose their assets. Their family will receive the market value of those shares, and the business will remain in the hands of those who run it, and you will not have to deal with someone's son, who may not have the experience or desire to work, and you will not find yourself in a situation without a mechanism to resolve this problem; The same principle applies to LLCs .
This is called an operating agreement. This is the basic governing structure of an LLC, and it should include a provision for what happens when someone dies, because as you rightly point out, if you don't have an agreement on what to do in the event of someone's death, then it is the estate plan, trust, will, or even the laws of inheritance that will determine the fate of those shares, and it doesn't matter what you agreed upon verbally or what you think that person would have wanted.
You are left with whoever inherits those shares, and there is no mechanism to influence that. So now you are doing business with this person, whether you like it or not, and they have all the rights of a shareholder, all the rights of a member of an LLC, so you should think about it. I would advise that if you have n't reviewed your operating agreement, purchase and sale agreement, or joint ownership agreement in a while, if you don't have an agreement between the business participants, to start thinking about it as soon as possible.
After all, the price of the services of a lawyer who will draw it up is insignificant compared to the consequences if something happens and there is no mechanism to decide the future fate of the business. I'm currently handling a case that's getting ready for trial , so I'm sure both sides have already spent money on lawyers.
I mean, I don't know the exact numbers, frankly, but I can roughly estimate the math. That's probably about $100,000 each for a property worth about a million, maybe $800,000. And what struck me was that the operating agreement was perfect while the deceased was alive. He was a real estate professional, a businessman who had amassed a fortune in a company that he probably ran himself.
So for him, you know, to have real estate and have him as a partner— of course, it was something to be concerned about, because he was exactly the kind of person you would want to own property with. His son is not interested at all . He has no interest in real estate. He, he tends to avoid risks. He has other family problems in his life.
For him, it's just money, and he wants to provide for his family. So, the expectation was, it was a great deal to work together, which in my opinion turned out to be false. You mentioned several different options. I think people think that you can go online and get a ready-made contract. The answer is: yes, there will be standard options, but the question is, are they right for you?
What do they mean? Let's look at a few scenarios to understand this. Tell us a little about the process: when someone approaches you, how do you help them understand that there are many options, but you have to choose the right one. Yes. This is a valid observation. And I mean that the risk doesn't just apply to the party that passed away.
That is, you need to very carefully consider whether the redemption is voluntary or mandatory, as well as the payment terms, because, say, if it is commercial real estate, the value of which has increased significantly. Let's say it's a $ 20 million property , it has two owners, and you draw up a contract according to which in the event of the death of one, the other participant is obliged to buy out his share at market value.
This is a $ 10 million contractual obligation that the heirs of another participant can bring against you. And that, you know, is scary. Therefore, you need to work with a lawyer to clearly determine whether you want to make these terms optional or mandatory. And if you can't finance the buyout , what are the other options?
Do you have the right to force the sale of real estate? Does the heir have the right to demand the sale of the property? Is it worth insuring the lives of both owners to have funds available? And then the payment is made within the amounts under these life insurance policies. Other options are payments over a period of time, as liquidity problems with a one-time payment can create great difficulties; The heirs, of course, would like to receive the full amount, but if there is no money, it will not help anyone.
So, you need to understand your business, its value, and profitability. And you know, I think you also need to consult with your lawyer from time to time, because when you're starting out and it's a small family business, you can negotiate a buyout in a lump sum, but as you scale up and get bigger, you need to revisit these things and look at life insurance, installment payments, or converting mandatory obligations into optional ones—those are the kinds of things that you should be looking at.
We generally do not advise our clients to enter into agreements with binding obligations for them or the company unless they are confident that they will be able to fulfill them. So we prefer a right of first refusal or a right of first refusal, where they have, say, 60 days to decide whether they want to act on the terms of the deal, but they still have the right to refuse, because it's better to let someone inherit it than to have obligations that you can't fulfill.
Therefore. True. I think the main reason why many sports teams have gone from family-owned to large corporations is that when you have a billion-dollar fortune and four children, you divide it up, you pay inheritance taxes, and you just can't meet the obligations when transferring the business. They didn't have, you know, the Dodgers just didn't have an extra billion dollars in real estate or cash to pay dividends from a business that was based on asset appreciation.
It's the same with individuals: you see real estate going up in value, businesses going up in value. They usually don't have cash in the bank that is equal to half the value of the company. They have maybe 10% or less. You know, they have inventory , equipment, buildings, brand, and intellectual property worth millions of dollars.
You may only have a million dollars in cash in the bank at that point, and that's why these things become important. Well, look, I'm very grateful that we were able to discuss what I think are two main issues. Real estate taxes, I believe , are a big and very complex issue that requires proper planning.
And also the issue of continuity in business, which I have seen is often ignored and leads to real problems, especially emotional ones, because people spend their lives building a business and want it to continue; but if you want this legacy to live on, you have to plan for it and prepare for it. It's not that simple.
Um, Connor Inlaws of TLD Law is a transactional lawyer specializing in real estate transactions, business planning, probate, and inheritance matters. Thank you so much for being with us, Connor. I am sincerely grateful for this opportunity. If you need more information, the website is tldlaw.com, and you can also contact him at 562-923-0971 or via tldlaw.com.
If you are driving and didn't have time to record, contact me. I will be happy to help you get in touch. Connor, thanks again for joining us . I really appreciate your time, as always. Yes, with pleasure. It was nice talking to you, Bill. I hope we hear from you again soon. All the best. See you later.
Have a nice day. This is Probate Weekly. We meet weekly with lawyers to discuss inheritance issues: how to avoid it and what to do if you are already in the process. In this issue, we looked at useful questions on how to avoid going to court in inheritance cases so as not to deal with unwanted situations or experience the consequences of a lack of planning.
I hope you enjoyed it. I think so . I look forward to your feedback, comments, questions, please like, subscribe, and share. If I can be of any help, look for @billgrosso probate on social media. As always, make today your best day. Thank you very much .
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