ChrisRecord.com » Real Estate

Legal Tip: How Do I Divide the Family Business between My Children?

Chris Record — Thu, 26 Nov 2009 04:04:12 +0000

As an entrepreneur I always keep my ear to the ground for valuable information that experts are willing to share, and today I was introduced to a great article on how to divide the family business between your children.

This may or may not apply directly to you and your business, but the information is still extremely valuable. Pass this along to anyone that you know that runs a family-owned business that might benefit from this…

Kenny Childs is an attorney with Kyler, Kohler, Ostermiller & Sorensen, LLP (“KKO Lawyers”), who regularly helps his clients with estate planning issues. He has written this article to share some advice with us on how to handle and “pass-on” the family business.

Is fairness between your children important to you and your family? How do you divide your estate between your children who have worked and been involved in the family business all their lives and those children who haven’t? Should the children in the business buy the business on sweetheart terms and still share equally in the estate? This is a major issue for those families operating their own businesses. The biggest mistake you can make is failing to address this issue in your estate plan. Failing to make these sorts of decisions before you pass away can cause years of contention and pain for your surviving family members.

Generally speaking, we believe that if you have children involved in the family business and both you and the children want to keep the business after you pass on, it is critical that the children who are in the business buy or inherit all of the business interests and if possible, the business real estate. Otherwise, the family is left in a state where they have serious conflicts of interest. We have seen relationships between family members destroyed because a parent thought it wise to leave a child not involved in the business his or her “share” of the business so he or she could receive an income stream and not feel left out.

The problem with this is that most family owned businesses do not pay significant dividends; the child not working in the business owns a valuable asset but it is useless to him or her unless the business is sold. On the other hand, if there is a significant dividend or distribution out to the child not working in the business, the children in the business feel as if the non-working child receives significant dollars while doing nothing. Also, children in the business will also have different investment and cash flow goals for the business than the outside child. This does not mean that all of the children cannot inherit equal values; it just means that the children outside of the business should inherit other assets, not the business.

In dealing with dividing the business real estate, we usually recommend that the children in the business either buy or inherit the property. When this isn’t possible, consider putting in place a lease that can only be terminated by the company and that sets a fair market value for rents based on an appraisal done every few years or a lease involving automatic increases. The children in the business can also be given an option to purchase the real estate within a certain time period for its fair market value. This allows them to buy some time after the parents have passed on to prepare to purchase the real estate from the estate.

In order to accomplish the goal of having a clean break between the children involved in the business with those that aren’t, there needs to be liquidity within the estate in order to “pay off” the children that won’t be involved in the business. Other assets that may pass to children not involved in the family business include the personal residence, retirement plans, savings or investment accounts, rental or other investment property and life insurance proceeds. If your estate is lacking in other assets to pass to children not involved in the family business, then life insurance is almost always the best route to take to give liquidity to the estate.

As we have discussed in previous newsletters, in order to avoid estate taxes on life insurance, we use an Irrevocable Life Insurance Trust that effectively gets the life insurance out of the estate before you pass away in order to avoid the insurance proceeds from being added to the value of your estate. Beware however, that this strategy is not one to implement on your death bed as you would obviously be uninsurable at such a time and if you do pass away within three (3) years after an existing policy is assigned to an Irrevocable Trust, the full value of the policy is subject to estate taxes.

Another way to give liquidity to your estate is to begin investing now outside of the business. So many times our clients are focused exclusively on re-investing inside the business, which is obviously very important, however this creates all of the wealth to be passed on limited to the business itself, which fails to provide liquidity for those children outside the business. Consider not paying off all of the business debts immediately and consider making investments apart from the business. A 401(k) or other retirement plan may be a good start. Obviously there is a delicate balance to be struck here and decisions regarding where and when to make such investments should not be taken lightly.

The biggest mistake you could make is failing to implement a plan long before you pass away. The older you get the more limited your options become in implementing different strategies to both minimize estate taxes and to ensure fairness in dividing the family business between your children. Furthermore, providing all of the children a plan in advance gives the children time to come to terms with the division of the estate and do their own planning for the future based on the division. Allow a way for your family to avoid the grief and pain caused by failing to properly plan for a division of the family business long before you pass away.

If you feel this is an issue your family needs to address, please call the offices of KKO Lawyers to make an appointment with Kenny Childs and tailor an Estate Plan to your situation. If you have any questions or feedback, feel free to comment :)

$8000 First-Time Home Buyer Tax Credit Extended!

Chris Record — Thu, 29 Oct 2009 01:21:04 +0000

UPDATE: 11/6/09 – President Obama reups popular tax credit through June 2010 and expands it to include people with higher incomes and some who want to trade up into new homes. (click here to read more…)

11/5/09 – House lawmakers passed the bill today in a 403-12 vote, and now the bill goes to President Obama who is expected to sign. (click here to read more…)

Great news came across the newswire today about the First-Time home buyers tax credit. It looks like Senators have agreed in principle to extend the credit although it still has to be inserted into a bill & voted on by the house. Headlines across the nation are slightly confusing on whether or not this will go through, but many feel that it will surely pass.

Here is what USA Today had to say about today’s announcements:

“Senators agreed to extend the existing tax credit for first-time homebuyers while offering a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least five years, said Regan Lachapelle, a spokeswoman for Senate Majority Leader Harry Reid, D-Nev.

The tax credits would be available to homebuyers who sign sales agreements by the end of April. They would have until the end of June to close on their new homes, according to a summary of the legislation being circulated among lawmakers.”

Based on today’s compromise it looks like the income limit would also be raised to $125,000 a year for individuals and $225,000 for married couples, up from the current income limits of $75,000 and $150,000, respectively. This means that more people will be in a position to capitalize on this incentive, which hopefully will fuel more home sales.

Many sophisticated real estate investors are excited about this potential extension because they are able to work with people facing foreclosure to create a win-win-win scenario where they can help purchase their home without them getting a foreclosure attached to their credit. Investors can then fix up the home and sell it at a discount to first time home buyers who can leverage this extended tax credit. Everybody wins and neighborhoods are being improved at the same time.

Question:

Are you glad that Senate leaders compromised to extend this tax-credit or do you think that it will hurt new and existing home sales? I would love to hear your feedback in the comments below!

2010 – The Rise of the Sophisticated Real Estate Investor

Chris Record — Mon, 28 Sep 2009 07:31:26 +0000

Recently I spent some time researching statistics related to mortgage origination, foreclosures, and our economic climate as it regards to investing in real estate. Based on all of my research I am convinced that we are going to see a massive increase in opportunity in 2010 and I am excited to position myself in front of these trends to capitalize on it!

Foreclosures have been booming around the country, and with the limited ability to get funding we have seen a surge in creative real estate investing. We have also seen the average investor lay low because of the difficulty of today’s real estate market which has presented even more deals and opportunities for sophisticated investors who know how to negotiate and move properties.

Here is a summary of reasons why I feel that 2010 will be the year that sophisticated real estate investors create a tremendous amount of wealth…

SUPPLY AND DEMAND

As the population goes up, the demand always goes up as well. Many amateur investors are focused on where the market is today, rather than looking at the past to recognize trends for the future. Supply and Demand always rules but only savvy investors allow logic to lead over emotion. Remember these three words: “Numbers Never Lie”.

Currently the population in the United States is soaring and according to an article in USA Today, we are projected to reach over 400,000,000 people by 2042. According to the US Census Bureau we are gaining a new person every 11 seconds (one birth every 7 seconds, one death every 13 seconds, and one international migrant every 31 seconds). We are also seeing record numbers of births as more babies were born in the United States in 2007 than any year in the nation’s history, topping the peak during the baby boom 50 years earlier!

Soaring Population in the United States

In order to become a more sophisticated investor, it is important to understand population trends related to your local market that you are investing in as well. Use this tool to compare population growth of the states you are investing in to get an idea of whether your market is growing or not. Here is an example of the DC Metro population growth comparing Virginia, DC & Maryland.

Population Growth in Washington DC, Maryland & Virginia from 1979 to 2000

So as you can see from this graph, DC has maintained it’s population while Maryland and Virginia have shown tremendous growth. Also take into consideration that this date is only up to the year 2000.

Understanding supply and demand truly helps separate the sophisticated investor from the average investor. When we take a look at the rolling 12 month single-family permit activity across the nation, it become pretty evident that we are ready for a rebound in permit activity in 2010 and many educated investors believe that we will start to see this turnaround in 2010 for a variety of reasons.

Rolling 12-month single-family permit activity from 1960-2009

REAL ESTATE IS ON SALE

When we look at the cost of housing compared to family incomes we can see that today’s down real estate market is completely different from the real estate market of the 1980’s when the ratios reached as high as 60%! From this chart we can easily identify that real estate is on sale and is very affordable for the average family. We are currently seeing a 25% affordability ratio on homes nationwide which allows investors to move properties much faster as their are more able buyers out there.

National Housing Cost/Income Ratio 1971-2009

MONEY IS ON SALE

Next we take a look at the 30-year FRM rates vs. Prime Rates from 1971-2009. I remember back in 2004 when every loan officer and mortgage broker was urging everyone to refinance and lock in low rates before they catapulted back up to over 10%. Of course we all believed the could not possibly stay that low so record numbers of refinances started happening and people were happy they locked in such a low interest rate. However, here we are several years later and interest rates are still unbelievably low! In a traditional real estate bubble you would expect rates to jump up as high as 15-20% but we are in a fortunate situation where rates have stayed low and money is still on sale!

30 Year Fixed Rate Mortgage Rates 1971-2009

When you take into consideration that money is on sale and real estate is on sale it starts to really become clear why NOW is such an ideal time to become an investor. I.D.E.A.L. is actually a great acronym for real estate investors because real estate can provide:

Income
Deductions
Equity
Appreciation
Leverage

FORECLOSURE BOOM

According to My Budget 360 the foreclosure filings nationwide have risen from 100 million to 300 million in the past few years alone!

Foreclosure Filings Nationwide

There are countless reasons as to why our country got itself in this mess, and it is incredibly sad for many people that are facing foreclosure, faced with losing their homes, their dignity, their equity and their credit. On the other hand if you are someone that is looking to purchase a home, the opportunity has never been better!

in 2001 only 1% of all mortgage loans originated were interest-only or neg-am loans. By 2006 that number had reached nearly 30%! The first graph below shows the Option ARM (adjustable rate mortgages) reset schedule, totaling hundreds of billions of dollars in the next two years. The next graph is the interest only and negative amortization share of total mortgage purchase origination’s for 2000-2006. Keep in mind that “73 percent of homeowners with ARM’s don’t even know how much their monthly payment will increase the next time the rate goes up.”

Option Arm Reset Schedule 2008-2012

Interest Only and Negative Amortization Share of Originations from 2000-2006

My reason for sharing these graphs with you is to help you understand that we are getting ready to see another wave of foreclosures come in as a result of the ARM’s resetting and people not being able to afford their new payments. When I really started diving deep into these statistics it became clear to me that 2010 would be a great year of investing, but that it would require becoming a sophisticated investor to take advantage of it.

I believe that we will start to see a turnaround in the single family permit activity in 2010. Most of my professional contacts in the construction industry share this opinion with me as well.
I also believe that we will continue to see a steady flow of foreclosures that won’t stop anytime soon. This provides a great opportunity to pick up properties at deep discounts either directly from homeowners in the pre-foreclosure phase, or from auctions and banks after they have been foreclosed.
Due to the difficulty in getting traditional financing, the majority of these properties are going to be picked up by sophisticated real estate investors using creative acquisition strategies.
Since real estate and money are both on sale, now is the time to take advantage of these trends and opportunities.

So in summary, I would encourage any would-be real estate investor to start studying pre-foreclosure investing as well as auctions and REO’s. There are opportunities in today’s market to pick up properties for 50% of the appraised value when you know what you’re doing and there is an influx in hard money lenders and private investors out there that are looking for better returns than they have been getting in the stock market lately.

The key to becoming a sophisticated investor to take advantage of this perfect storm in 2010 is to first get educated. Learn about Subject-To as a technique to pick up properties with no money and no credit. Learn about Wholesaling as a way to move these properties quickly to other investors who will fix them up and retail them. Learn about Hard Money Lending and how to raise private capital by helping people self-direct their retirement plans. And most importantly get connected with other local sophisticated investors in your area that you can do deals with and partner with to help ease your learning curve.

Please comment below to let me know your thoughts and opinions of today’s real estate market and where you feel the deals and opportunities currently are. If you are having success with a specific real estate strategy, please share it in the comments below so that we can all network and find out what’s working! And if you would like any assistance getting started as a real estate investor, feel free to contact me and let’s take advantage of this Perfect Storm in 2010!

Chris Record, CEO
Record Investments, Inc.
925-482-5478
cashflowchampion (at) gmail.com

7 Tax Strategies Every Real Estate Agent Should Know!

Chris Record — Wed, 16 Sep 2009 04:46:28 +0000

Mark J. Kohler

My personal lawyer, Mark Kohler, specializes in helping Realtors and Entrepreneurs with Tax and Legal Strategies to help them KEEP more of the money they work so hard for. Recently I invited him to Raleigh, North Carolina to speak to a room full of business owners and real estate investors and the feedback that we received was amazing! I wanted to share with my Active Rain community 7 Tax Strategies that Every Realtor Should Know. I would love to hear your feedback :)

7 Tax Strategies Every Realtor Should Know

By Mark Kohler, CPA (KKO Lawyers)

In our practice, we have helped many Realtors in tax planning for themselves and for their businesses in order to maximize tax savings that have helped many of our Realtor clients be successful in putting more money in their own pockets, as well as that of their customers.

1. The Value of an S-Corporation.

In our opinion, every Realtor that is independently employed by brokers should seriously consider the use of an S-Corporation as their form of doing business. The major benefit to using an S-Corporation versus a Sole-Proprietorship is the ability to save on self-employment tax. The self-employment tax rate is 15.3% on every dollar earned, while through the use of an S-Corporation the owner can split salary and dividends to save dollars on the dreaded self-employment tax. As an added bonus, the S-Corporation provides liability protection for the Realtor and may protect their personal assets in the case of a lawsuit from a project gone bad.

2. Self Directed IRA’s.

In the last several years many more self directed IRA management companies have come into the market, providing IRA owners the ability to take their IRA funds out of the traditional stock market and invest their IRA funds in real estate. Often times, individuals would like to invest in real estate but do not have the available cash to afford the down payment and get the project ‘jump started.’ Utilizing IRA funds has become a very popular strategy in allowing people to better utilize their retirement funds. However, care must be given to plan appropriately with your accountant or tax attorney familiar with these types of transactions. Most IRA Managers require a Limited Liability Company (LLC) to hold the investment for the IRA and thus require further consultation and support. In sum, the time and cost to implement a self-direct IRA real estate project is affordable and often times outweighs other options.

3. 1031 Exchanges.

Although there has been a reduction in the capital gain rates through the Job’s and Growth Tax Relief Reconciliation Act of 2003, signed by President Bush in May of 2003, the 1031 Exchange is still very viable for real estate investors and their agents helping them to invest in property. The 1031 Exchange allows any property owner to exchange their property for equal or greater value into multiple pieces of property while deferring the capital gain tax regularly due upon sale. The higher the value of the property the greater the tax savings. Generally, it is going to behoove the investor or their agent to utilize the services of an intermediary 1031 exchange company. An intermediary handles the transactional documentation and escrow services while working closely with the title company during the purchase and sale of the properties.

4. Tax Benefits of Rental Real Estate.

Many new Realtors have not experienced the power of depreciation and flow through losses from rental real estate. I would recommend that every Realtor take the time to study and learn about rental real estate and the deductions related thereto, such as depreciation, chattels, and tax-free appreciation. Many times the greatest financial return from rental real estate is not the cash flow from the rental itself, but from the tax-free appreciation and the depreciation flow through losses from the operations of the business. Many of my clients feel that they have a fantastic rental property when they break even with cash flow because of the ancillary tax benefits that are created there from.

5. Stepped-up Basis in Capital Assets Upon Death.

Even with the current changes to the estate tax provisions of the Internal Revenue Code, the “stepped-up” basis provisions are still in effect for several more years. What these provisions provide is that when an individual passes away, any capital assets they owned receive a stepped up basis to fair market value. Sometimes, holders of real property will make the mistake of placing the children or other family member’s names on the asset that would have previously received a stepped up basis. Therefore, when a person passes away, only a portion of the property is stepped up due to the fact that they only owned a portion of the property. Agents and real estate investors should be very careful as to how they change the ownership of the property with a person that is older or has health concerns because the tax impact can be dramatic.

6. Estate Taxes.

Every real estate professional should be generally familiar with the estate tax provisions so they can advise their clients that own large pieces of property. It is too bad that some people “loose the Family Farm” due to the estate taxes because they were not properly advised to do estate tax planning. Many agents have land owners that are farmers and ranchers that have large tracts of land but are cash poor. These land owners should consider the use of Charitable Remainder Trusts and other mechanisms to save on potential estate taxes.

7. Keeping good records and planning.

Many business owners wait until April 15th to try to do their tax planning for the past year. It is critical that taxpayers keep good records of the tax deductions they are trying to take throughout the year and meet on a regular basis with their accountant or tax attorney to go over strategies that may be helpful in their business. Travel, entertainment, home office and advertising expenses are deductions a realtor should certainly consider and take advantage of. Due to poor planning and record keeping, many Realtors don’t take deductions that are legally theirs. In summary, we recommend that every Realtor take the time to build a strong relationship with a business/tax planner that can facilitate and advise on many of the above strategies for the realtor and for the Realtor’s customers.

You can learn more about Mark Kohler by visiting him online at http://www.MarkJKohler.com or http://www.KKOLawyers.com