By Matthew A. Quick For those that have real estate that they wish to be owned by an entity (a good idea for the sake of liability, tax and succession planning), the most beneficial entities to consider are generally neither S Corporations, nor C Corporations. Only a Partnerships or LLCs have the benefit of making a 754 Election, which provides a step up in basis upon the death of an owner. A step up in basis reduces the taxable gain on a future sale, thus reducing the eventual tax.
Deed Restriction Prohibition (Illinois)
By Matthew A. Quick The Property Tax Code has been amended to prohibit a deed restriction, restrictive covenant or similar provision from waiving or restricting the statutory rights to notice of a public hearing or the right to object, oppose or challenge (1) the creation of a special-service area; (2) the levy of any tax of a special-service area; or (3) the issuance of bonds of a special service area. This law became effective on August 23, 2011, and is codified at 35 ILCS 200/27-55a.
Deceased Joint Tenant Affidavit (Illinois)
By Matthew A. Quick If real estate is owned jointly (joint tenancy, tenancy by the entirety (husband and wife)) and one of the joint owners dies, a Deceased Joint Tenant Affidavit, along with the decedent's Death Certificate, is required to be filed with the recorder in the county in which the real estate lies in order to transfer the real estate.
The Deceased Joint Tenant Affidavit ("affidavit") is a written, sworn statement that the decedent has passed and was the joint owner of the real estate. The affidavit must be completed by a person who was acquainted with the decedent (not necessarily an owner of the property), contain certain information, and be signed and notarized.
Mortgage Certificate of Release Act (Illinois)
By Matthew A. Quick The Mortgage Certificate of Release Act, specifically, 765 ILCS 935/1, et seq., notes the contents requirements of mortgage releases and the form and content of attendant documents. The forms available and the location of each follow:
-- The form of a certificate of release, 765 ILCS 935/50, -- The form of an appointment of title insurance agent for issuance of certificates of release, 765 ILCS 935/55, -- The form of a revocation of appointment of title insurance agent or agents for issuance of certificates of release, 765 ILCS 935/60, and -- The form of a hold harmless agreement, 765 ILCS 935/70.
Pursuant to 765 ILCS 935/20, a certificate of release must contain substantially all of the following for each mortgage being released:
1. The name of the mortgagor, the name of the original mortgagee, and, if applicable, the mortgage servicer at the date of the mortgage, the date of recording, and the volume and page or document number or other official recording designation in the real property records where the mortgage is recorded.
2. A statement that the mortgage was paid in accordance with the written payoff statement and there is no objection from the mortgagee or mortgage servicer or its successor in interest. With respect to previously paid mortgages, the hold harmless letter from a title insurance company, as provided in Section 10.1 of this Act, shall satisfy this requirement.
3. A statement that the person executing the certificate of release is an officer or a duly appointed agent of a title insurance company authorized and licensed to transact the business of insuring titles to interests in real property in this State.
4. A statement that the certificate of release is made on behalf of the mortgagor or a person who acquired title from the mortgagor to all or a part of the property described in the mortgage.
5. A statement that the mortgagee or mortgage servicer provided a written payoff statement. The hold harmless letter from a title insurance company shall satisfy this requirement with respect to previously paid mortgages.
Foreclosure and Security Deposits (Illinois)
By Matthew A. Quick The Code of Civil Procedure has been updated to require the mortgagor to transfer to the purchaser any security deposit and accrued interest paid by a current occupant if the mortgaged real estate contains five or more dwelling units. The purchaser must post a notice that informs the occupant of the security deposit at each dwelling unit for which the purchaser has a security deposit within 21 days after the purchaser’s receipt of the security deposits. This change is effective immediately and is codified at 735 ILCS 5/15-1508.
Landlords and Changing or Rekeying Locks (Illinois)
By Matthew A. Quick The Landlord Tenant Act has been updated to require landlords to change or rekey locks of rental property after a renter moves out if the new renter has a written lease agreement. If the landlord does not change or rekey the locks, the landlord is liable for any damages for theft that occur. It exempts (1) apartment buildings with four units or less if the owner occupies one of the units or (2) the rented room is in a private home also occupied by the owner. This law will become effective January 1, 2012, and is codified at 765 ILCS 705/15.
IRS's 10 Tax Tips for Home Sellers
By Matthew A. Quick Here are the IRS's top 10 tax tips for home sellers:
1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. If you can exclude all of the gain, you do not need to report the sale on your tax return.
5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
6. You cannot deduct a loss from the sale of your main home.
7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
9. If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year's tax return.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.
Prohibitions of Due on Sale or Acceleration Clauses in Promissory Notes Secured by Real Estate
By Matthew A. Quick A due on sale clause, or acceleration clause, is the provision in a contract, most often a promissory note (a promise to pay), that authorizes the lender to demand payment of a sum when the property that is acting as security is sold or otherwise transferred. Federal law, specifically Title 12, Chapter 13, Section 1701j-3, restricts the ability of lenders from invoking such a provision under certain circumstances (also called Garn-St. Germain exceptions). These circumstances include, but are not limited to, the following:
The creation of a subordinate lender’s interest; The creation of a purchase money security interest for household appliances; A transfer on the death of a joint tenant; The granting of a leasehold interest of three years or less not containing an option to purchase; A transfer to a relative resulting from the death of a borrower; A transfer where the spouse or children of the borrower become an owner of the property; A transfer resulting from divorce; and A transfer to an inter vivos trust in which the borrower is and remains a beneficiary.
Exempt Transactions and Forms (Illinois)
By Matthew A. Quick When filing a Deed of an Exempt Transaction (typically involving consideration of less than $100 pursuant to 35 ILCS 200/31-45 Paragraph (e)) certain forms are required to be filed along with it. In the City of Chicago, the Deed must be accompanied by a Statement by Grantor and Grantee, as well as a City of Chicago Property Transfer Tax Declaration. Outside of the City of Chicago, but within the County of Cook, the Deed must only be accompanied by a Statement by Grantor and Grantee, and comply with any local requirements (e.g. In Westchester there is a transfer stamp requirement, even on Exempt Transactions). A Cook County Transfer Declaration is not required in Exempt Transactions in the County of Cook. In addition, a PTAX Form is not required throughout the State of Illinois in Exempt Transactions.
Property Transfer Affidavit (Michigan)
By Matthew A. Quick When real property, and sometimes personal property, is transferred (even if by Quit Claim Deed for no consideration) a Property Transfer Affidavit (Form 2766) must be filed with the assessor of the municipality in which the property is located. The Property Transfer Affidavit must be filed within 45 days of the transfer. If the Property Transfer Affidavit is not filed within 45 days of transfer, the new owner could incur fines up to $200.
No Federal Tax Deduction for Loss on a Personal Residence
By Matthew A. Quick Although a gain on the sale of a personal residence over the exclusion ($250,000 for an individual; $500,000 for a couple) is taxed as a capital gain, a deduction cannot be taken if there is a loss on the sale of a personal residence. However, losses on investment property (a rental home) may be deducted.
For more on taxes on the sale of a primary residence/main home, click here.
The Estate, Issue Nine
By Matthew A. Quick Probate
Probate is the legal process of settling the estate of a deceased person. Settling a decedent’s estate involves making claims on behalf of the estate (collecting money owed to the decedent, bringing medical malpractice claims, etc.), resolving all claims against the estate (paying creditors, responding to lawsuits, etc.), distributing the property in the estate after all claims are made and resolved (distributions are made pursuant to a Will or the statutory rules of intestate succession), and addressing the guardianship of any minor children or other dependents (guardians are appointed in a Will or determined by statutory rules of guardianship).
Probate can be costly and time consuming, but it is not the same process with all decedent’s estates. Some estates do not require probate if there is no property to be distributed. An estate can be left with no property to be distributed, thus avoid probate, if the decedent’s property is not owned solely by the decedent upon his or her passing. Instead of the deceased owning property solely, he or she could hold property in a trust, jointly with another person, or provide a pay-on-death (referred to as “P.O.D.”) or transfer-on-death (referred to as “T.O.D.”) designation.
To own property in a trust, the person setting up the trust (referred to as the “Settlor”) transfers ownership of property to a Trustee based upon certain terms and conditions that are listed in a Trust Declaration. The terms and conditions of a Trust Declaration are instructions that the Trustee is bound to follow in maintaining or investing the Trust Property. One of the terms of the Trust Declaration is how the property that is being held in the Trust is distributed after the Settlor’s passing. Since the Trustee, not the Settlor, owns the property when the Settlor passes, the Settlor will have no property to be distributed through probate, thus negating the need for probate.
Joint ownership is another effective way to avoid probate. Joint ownership occurs when more than one person owns property at the same time, but each has a right of survivorship. Therefore, when one of the owners passes the other owners continue to own the property without the need for probate. Typically, we see joint ownership with real estate and deposit accounts (checking accounts, savings account, etc.).
Probate can also be avoided by setting up P.O.D. or T.O.D. designations on bank accounts, shares of stock, brokerage accounts, 401ks, IRAs, automobiles and life insurance. Any property that has a P.O.D. or T.O.D. designation will pass automatically to designated beneficiaries upon the passing of the owner of the property. P.O.D and T.O.D. designations differ from joint ownership because once someone is made a joint owner they are an owner and have equal right to control the property. Conversely, if P.O.D. and T.O.D. designations are used, the owner of the property retains control of the property until the date of his or her demise, at which time the property is transferred.
If property is owned solely by the decedent upon his or her passing, then the property must be distributed through probate. Estates that must endure probate will follow one of three general processes: (1) that of a testate estate; (2) that of an intestate estate; or (3) that of a small estate. A testate estate is one that follows directions of a valid Will when being administered. An intestate estate is one that does not follow the directions of a Will, but follows statutory rules of administration. A small estate is one that the legislature considers small enough to administer through a summary proceeding, which typically involves very limited, if any, contact with a court. In Michigan, the threshold for a small estate is $15,000 remaining in the estate after debts and expenses have been paid. In Illinois, the threshold for a small estate is $100,000.
The first step to probate a testate estate is to start a case with the Probate Court, which has special jurisdiction over cases involving estates and guardianship. The Probate Court will determine the validity of the Will and appoint a Personal Representative for the estate. The Personal Representative is typically nominated in the Will (when dealing with a testate estate the personal representative is also called an executor (male) or executrix (female)). Through, and with the power of, the Probate Court, the Personal Representative collects and inventories all of the property in the estate, pays any debts, taxes and expenses, follows the instructions of the Will regarding guardianship of any dependents and distribution of property, and adjudicates the interests of interested parties who may have claims for or against the estate.
The first step to probate an intestate estate is to also start a case with the Probate Court, but instead of determining the validity of a Will (since there isn’t one) the Probate Court will nominate and appoint a Personal Representative for the estate (when dealing with an intestate estate the personal representative is also called an administrator (male) or administratrix (female)). Like testate estates, the Personal Representative will act through and with the power of the Probate Court, however, rather than following the instructions of a Will, the Personal Representative must administer the estate in accordance with the laws of the state where the decedent resided at his or her death. This means that the estate must be distributed to the heirs named by the laws regardless of their relationship or kinship to the decedent. In sum, the intestate process takes all control out of the hands of the decedent’s family to distribute property or decide which person should be named guardian of minor children.
After all of the claims against the estate are paid, the claims for the estate are made, and the property that made up the estate is distributed, the case involving the estate is closed. From opening the case to closing the case, probate generally lasts several months, in some instances over a year, and incurs substantial court and attorney costs. To avoid the time, cost and publicity involved with probate it is imperative to organize an estate in a manner that will not require a lengthy court case, but will allow for a seamless transfer of ownership.
The Estate, Issue Eight
By Matthew A. Quick Real Estate Closings
A real estate closing (also referred to as a “settlement” or “escrow”) is the culmination of a real estate transfer. The real estate closing is simply the meeting at which the buyer of a piece of property pays the amount promised in the purchase agreement and is deeded the real estate. However, the process leading up to the closing, as well as the events that occur at the closing, tend to complicate the process.
The purchase agreement initiates the closing process. It is the document that outlines the understanding between the buyer and the seller that typically regards the following items, some of which are explained in further detail below: the date of the closing; the fixtures and personal property that will be sold with the real estate; the purchase price of the real estate; a schedule for depositing earnest money; a mortgage contingency (if not a cash sale); inspection of the real estate and modification of the purchase agreement; how proration of taxes and assessments will be handled; the time allowed to complete a title inspection and the party that is obligated to pay for title insurance; the time allowed to provide a survey and the party that is obligated to pay for the survey; the payment of transfer taxes; and any required disclosures.
Closing Date. The closing date is chosen by the buyer and seller approximately four to six weeks from the date of the purchase agreement with the understanding that the date may be changed if the parties so wish. The period between the execution of the purchase agreement and the date set for closing is intended to allow enough time for the parties to complete the items that comprise the balance of this article.
Fixtures and Personal Property. Fixtures are best understood by first considering the difference between real property and personal property. Generally speaking, real property is land and all of the rights, privileges and improvements to the land, such as buildings, crops and underlying mineral rights. On the other hand, any movable, tangible object is considered personal property, such as a wooden board, a chandelier or a kitchen appliance. A fixture is a piece of personal property that is fixed to real property to a degree that it is intended to become real property. Therefore, if the wooden board is used to make a shelf, the chandelier is attached to the ceiling, or the kitchen appliance is installed, it could become part of the real property as a fixture depending on the extent of the attachment. Rather than debate whether each piece of personal property is a fixture during every real estate sale, the purchase agreement details the items of personal property and the fixtures that will be transferred to the buyer. Typically, the personal property transferred includes kitchen appliances, washer, dryer, lighting fixtures, smoke detectors, window treatments, carpeting and built-in shelving or cabinetry; however, there is no limit to what may be included with the home may it be a stereo system or hot tub. Of most importance is to note in the purchase agreement the items of personal property that will be sold with the real estate so there is no misunderstanding.
Earnest Money. Earnest money is an amount agreed upon by the parties to be deposited by the buyer to bind the parties to the purchase agreement. Earnest money is usually placed in an escrow account and held until the closing date, at which time the funds are used to settle the sale. The deposit of the earnest money may be made all at once or over a period of time, in any instance the initial deposit is required upon the execution of the purchase agreement. If the earnest money deposit is a significant amount, the parties may agree to have the deposit placed in an interest bearing account with the interest paid to the buyer.
Mortgage Contingency. A mortgage contingency is a condition that requires the buyer to secure appropriate financing before the purchase agreement is given effect. It is a critical protection for the buyer, because if the buyer cannot secure appropriate financing the earnest money is returned and the purchase agreement is null and void. What is considered appropriate financing involves an agreement between the parties regarding the amount of financing, the annual percentage rate to be charged by the lender and the period allowed for repayment. By way of example, a mortgage contingency clause may provide “This purchase agreement is contingent upon buyer securing, within 40 days, a firm written mortgage commitment for a fixed rate mortgage in the amount of $300,000, the interest rate not to exceed 5% per year, amortized over 30 years.”
Inspection and Modification of the Purchase Agreement. The purchase agreement will contain an inspection provision that gives the buyer the ability to have the real estate inspected for any defects. The inspection period typically lasts five to seven business days. After the buyer has had the real estate inspected, the inspector will provide an inspection report detailing all of the property’s defects. The buyer and seller may then renegotiate the purchase price or repair of the real estate based upon the inspection report. The time allowed to renegotiate the purchase agreement is called the modification period, or more specifically the attorney modification period, because of an attorney’s role in renegotiating the purchase agreement. The attorney modification period is relatively short, typically no longer than the inspection period.
Title Inspection and Title Insurance. A title inspection is a review of the history of ownership of real estate to ensure that the seller owns and can sell the property he or she is offering. A clear title inspection is required if title insurance is to be purchased. Title insurance is an insurance policy to protect a buyer against loss based upon a seller’s lack of ownership, which could include an encumbrance or lien that was not noticed prior to the sale. In most transactions, the seller purchases the title insurance for the buyer.
Closing and Escrow. Prior to the closing date the parties, or their attorneys, will receive a settlement statement (also called a HUD-1) from the closing agent (who is typically from the title company—the company that issues the title insurance policy). The settlement statement is a balance sheet that details how the funds involved in the transaction will flow. This is an important document to review to ensure that all of the fees, costs and payouts are accurate. In addition, the settlement statement will let the parties know how much money they will need to bring to, or will be getting from, the closing.
On the closing date, the parties meet at the title company. The buyer will need to deliver a cashier’s check or have the funds wired from his or her bank for the balance owed on the purchase price after deducting the deposited earnest money and the amount of the home loan. The seller may also be required to bring funds to the closing to cover costs, fees or liens, such as a loan payoff.
In sum, at the closing, the closing agent will accept and disburse all of the funds pursuant to the settlement statement and the seller will transfer the deed for the home to the buyer. Both the buyer and the seller will be responsible for signing various documents at the closing. All of the documents signed at the closing involve either the transfer of the property being purchased or the funds being borrowed for the purchase.
The typical documents that relate to the transfer of the property are the following:
Warranty Deed. The warranty deed is the conveying document that transfers ownership of the property from the seller to the buyer. This document will immediately be filed with the county recorder of deeds (or register of deeds) to put the world on notice of the conveyance and the rightful owner.
Bill of Sale. The bill of sale is a receipt for purchase of all the personal property and fixtures that were sold with the real estate.
The typical documents that relate to the funds being borrowed for the purchase are the following:
Payoff Letter. The seller will bring a payoff letter for each outstanding loan on the property to give to the closing agent to certify that the funds being paid to the seller’s lender(s) are in an appropriate amount to clear the loans and give the buyer clear title.
Truth in Lending Statement (also known as “Regulation Z” or “TIL”). The TIL discloses to the buyer the interest rate, annual percentage rate, amount financed and the total cost of the loan over its life. It is important to review this document carefully to ensure that the rates are appropriate.
Monthly Payment Letter. The monthly payment letter reveals the break down of the buyer’s monthly payment into principal, interest, taxes, insurance and any other monthly escrows. Again, this document should be carefully reviewed to ensure that all amounts are correct.
Note. The note is the contract with the lender to payback any amounts borrowed.
Mortgage. The mortgage is a lien on the property as security for the loan. This document will be immediately filed with the county recorder of deeds (or register of deeds) to put the world on notice of the security interest in the property.
Although the real estate closing process may seem daunting, with close attention and the help of others the process can be easily managed.
-Real Estate Transfer Taxes-
Real estate transfer taxes are taxes imposed when property is transferred. In Illinois and Michigan the tax is assessed by an ad valorem (according to worth) tax that is based on the value of the property transferred. In some states, however, such as Vermont, a transfer tax is only imposed on gain from the sale; and in other states, such as Indiana, there is no transfer tax.
In Illinois and Michigan, the transfer tax is stated as a fee. For example, in Michigan the state fee for transfer is $3.75 for every $500 of the purchase price, which is equivalent to .75% of the purchase price. Therefore, to calculate the fee, take the purchase price and divide by $500, then multiply the quotient by $3.75 (or simply multiply the purchase price by .0075).
State and local laws may or may not stipulate which party is responsible for paying the tax. In addition, both Illinois and Michigan provide a number of exempted transfers that are not taxed, such as transfers where the consideration is less than $100.
Real estate transfer taxes involve basic mathematics, but the rates and responsibility for such can get confusing and require attention. If any questions arise, please consult a real estate professional.
-Conclusion-
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding estate planning are provided free to groups of any size. Please let me know if there is any way I can help.
Mechanic's Lien Act and Proper Services (Illinois)
By Matthew A. Quick The court in Mostardi-Platt Associates, Inc v Czerniejewski held: a company that provides services that do not result in any improvement to land or in any benefit to the landowner, such as an environmental consulting company, are not the type of services for which a lien can be filed and enforced under Mechanics Lien Act. The court stated that the proper focus in determining the validity of a mechanic's lien is whether the work actually enhanced the value of the land.
Mechanic's Lien Act and the Taxing of Attorney Fees (Illinois)
By Matthew A. Quick The court in the case of Action Plumbing Company, Inc v Bendowski held that a subcontractor's attorney fees cannot be taxed on subsequent purchasers of homes by including attorney fees in foreclosure actions, in violation of Mechanics Lien Act. The court stated that it was taxing attorney fees as against allegedly bankrupt developer, the developer had defaulted and thus was not in a position where it had to pay attorney fees to avoid any loss of interest.
Property Tax Appeals (Illinois)
By Matthew A. Quick In light of the decision in Cook County Board of Review v Property Tax Appeal Board, if a violation of uniformity (an unfair assessment when considering the value of comparable properties) is proven by clear and convincing evidence to a property tax appeal board, then property is not equitably assessed for levying tax thereon and a new assessment must be given. This is true regardless of whether two condominium buildings have the same physical characteristics and percentage of ownership in the common elements. The assessments of the condominiums should not rest merely on these factors. Rather, the assessments of the condominiums should differ depending the means by which they had been subdivided or any other characteristics.
Real Estate Licenses and Covenants (Illinois)
By Matthew A. Quick The case of Board of Managers of Hidden Lake Townhome Owners Association v Green Trails Improvement Association shows the importance of understanding the difference between a license and a covenant. A license is permission to use another's property, but is generally revocable or has a specific termination date. A covenant is a promise that runs with the land and is generally irrevocable. This case concerned a pathway that the home owner's association could utilize, but contribute to maintenance. The agreement was only for 50 years. At the end of 50 years, the agreement regarding the pathway (a license) expired and neither party could enforce their interests based upon the original agreement. If the arrangement would have been a covenant. Then the agreement would have run with the land for an indefinite period of time.
The Estate, Issue Seven
By Matthew A. Quick Real Estate Taxes
Real estate taxes are the main source of revenue for local municipalities, which are used to provide benefits and services such as schools, community colleges, police and fire departments, health care facilities, museums, water and sewer, roads and sidewalks, parks, libraries and so forth. Real estate taxes are calculated using the value of the property, which is called an ad valorem (according to worth) tax. Once the value of a parcel is established, a tax rate is applied, thus yielding the property tax owed. Determining the value of a piece of land (also referred to as a “parcel” or “tract”) and levying the appropriate tax is a process that involves several factors.
For administrative purposes, a property identification number (referred to as a “PIN”) is initially given to each piece of land (usually a 10 to 14 digit number), allowing land and tax records to be easily identified and transferred between municipal departments. Then, to figure the value of the parcel, an assessment is performed by the county or city assessor, who is a public official that appraises the property. The property assessment may be according to one or more appraisal methods, such as market value, replacement cost or income value. In Illinois, parcels are assessed every three to four years; in Michigan, parcels are assessed upon transfer and the assessed values are increased annually by an appreciation factor (the lesser of either the rate of inflation or 5%).
While some municipalities assess the property at its full value, others determine the taxable value of a parcel based upon a percentage. The determination of the assessor as to the taxable value of a parcel of property may be appealed by the property owner, typically within a limited timeframe.
In Michigan, after the property is assessed, there are no further calculations to determine the taxable value. However, after the property is assessed in Illinois, the calculations can get tricky by including such figures as an established assessment rate and state equalization factor, which are set by the county and state (basically, a means to manipulate property taxes without changing the property’s assessed value).
When the taxable value of the property is determined, the tax rate is then applied to determine the amount of tax owed. In Michigan, the taxes are levied as a millage rate, which is equal to 1/1000th of a dollar. Thus, to figure tax on a millage rate of 4.19, simply multiply .00419 by the taxable value of the property. On the other hand, Illinois property taxes are computed on a percentage basis of the taxable value of the property. Additionally, some exemptions are available to homeowners, seniors, veterans and the like, which are dollar for dollar reductions in the amount of tax owed.
When buying or selling property, prorating property taxes is an issue. In Illinois, property taxes are paid in arrears, which means that 2009 taxes are due this year. Therefore, the seller will pay the buyer for the days the seller spent occupying the property that have not yet been paid. In Michigan, however, taxes are paid in advance, which means the buyer will pay the seller for the days the buyer will spend occupying the property that have already been paid.
Property taxes vary in each municipality, be it by tax rate or mode of assessment. Because property taxes represent a substantial expense for property owners, each property tax bill should be independently examined to ensure it is accurate. If there are any questions regarding the accuracy of a tax bill, do not hesitate to contact the assessor, treasurer or a property tax professional.
-IRAs-
Regardless of age or proximity to retirement, one of the most important decisions to be made regarding one’s financial future is the source of retirement income. The federal government and many individual workplace organizations have retirement programs that are offered to employees, such as 401(k) (private sector retirement plan), 403(b) (non-profit sector retirement plan) and 457 (government retirement plan) plans. However, many questions have surfaced as to the reliability and security of these programs in the years to come. Also, many individuals are seeking investment options in addition to workplace plans, which has prompted an interest in individual retirement arrangements (referred to as “IRAs”). IRAs are a great way to diversify investments and secure retirement resources with beneficial tax treatment. IRAs come in many different varieties, thus allowing an IRA to easily be tailored to an individual’s investment and estate plan.
Introduced in 1974, an IRA is a specific retirement plan that can be built to one’s needs. Even though IRAs have developed significantly over the years and have taken several different forms, the traditional IRA and the Roth IRA illustrate the greatest difference that remains among the several types; that is, the method by which each is taxed.
The government has provided beneficial tax treatment for IRAs. Instead of taxing each transaction that occurs within an IRA, which is typical of a common investment, such as buying and selling stock, all transactions within an IRA have no tax impact. With a traditional IRA, a contribution is tax deductible, which means that no income tax is paid on the contribution. Instead, withdrawals are taxed as income. On the other hand, with a Roth IRA, a contribution is not tax deductible, which means income tax is paid on the contribution and withdrawals are not typically taxed.
Currently, the government allows a $5,000.00 per year maximum contribution for those under the age of 50 and a $6,000.00 per year maximum contribution for those over the age of 50. A contributor will be allowed to fund a traditional IRA over the annual contribution limit, but will not be allowed to make a tax deduction of any amount contributed over the annual limit. Alternatively, a contributor is altogether barred from funding a Roth IRA beyond the annual maximum contribution.
In addition to contribution limits, an IRA investor must also fall under an income threshold to enjoy the tax benefits of an IRA. For instance, to make a tax deductible contribution under a traditional IRA, a contributor who is married and filing jointly cannot have a modified adjusted gross income (referred to as “MAGI”) over $177,000.00. To contribute to a Roth IRA at all, a contributor who is married and filing jointly cannot have a MAGI over $177,000.00.
Conversions from a traditional IRA to a Roth IRA have gained substantial popularity this year because there is no income limitation on who can convert. Anyone with any MAGI can make a conversion. While a contributor continues to be barred from directly funding a Roth IRA with a MAGI that exceeds the income limitation, a traditional IRA may still be converted to a Roth IRA. There are several benefits of converting a traditional IRA to a Roth IRA, which include, but are not limited to, tax-free growth, tax-free withdrawals, and no minimum distribution requirements. Taxes would have to be paid on a conversion to a Roth IRA; however, so long as the conversion is done in 2010, the taxes on the conversion may be spread out over the 2011 and 2012 tax years.
Due to the income limitation, some contributors may not qualify to make a tax deductible contribution to a traditional IRA or any contribution to a Roth IRA; however, setting up a traditional IRA that is non-deductible would allow a contributor to convert to a Roth IRA in the future. If the laws remain unchanged in years to come, a contributor that is above the income limitation would be allowed to contribute to a traditional IRA that is non-deductible every year, then convert it to a Roth IRA.
An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA, such as collectibles (art, baseball cards and rare coins) and life insurance, is a prohibited transaction and disqualifies the fund from its beneficial tax treatment. Once a contribution is made to an IRA, the IRA owner can direct the institution that is holding the IRA to use the contribution to purchase most types of securities and investment products.
Although funds can be distributed from an IRA at any time, there are limited circumstances when money can be distributed or withdrawn from the account without penalties. In most situations, to avoid penalty, funds cannot be withdrawn before two circumstances exist: the contributor reaches 59 and a half years of age and a five year period has lapsed since the contribution was made. There are additional exceptions that apply to early withdrawals, such as disability, a distribution to a beneficiary after the contributor’s death and when the funds are used to buy, build or rebuild a first home.
IRAs can be included in several investment arrangements that may be used to achieve sufficient retirement resources. If you have any questions, please be sure to consult a financial professional for more information on IRA eligibility, conversions, contribution limits, when the funds must be used, and what type of IRA would best suit a particular financial profile.
-Update-
Michigan Enacts E-mail and Text Message Prohibition while Driving. As of July 1st, there is a ban on sending, typing or receiving text messages or e-mails while driving (MCL 257.602b). A first offense is punishable by a $100.00 fine; a second or subsequent offense is punishable by a $200.00 fine. There are no points assessed to the driver’s record for violation of this statute.
Illinois Modifies the Process by which a Red-Light Camera Issues Tickets. Effective January 1, 2011, Public Act 96-1016 changes the use of red-light cameras that give tickets automatically as follows: (1) a law-enforcement officer must review and approve all determinations that a car committed a red-light camera violation; (2) additional fees cannot be charged to an alleged violator for exercising his or her right to an administrative hearing; (3) the motorist must be given at least 25 days after an administrative hearing to pay any penalties; (4) governments must produce a recorded image of a red-light camera violation and make the images available on the internet; and (5) a red-light violation cannot be given if the motorist moves past the stop line or cross walk and the vehicle comes to a complete stop, but does not enter the intersection.
Illinois Increases the Surviving Spouse Award in Probate. Public Act 96-968 increases the minimum surviving spouse award from $10,000.00 to $20,000.00 and increases the minimum award for a surviving minor child or an adult dependent child from $5,000.00 to $10,000.00 in estates in which the decedent passed after July 2, 2010.
-Conclusion-
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding special needs planning and estate planning are provided free to groups of any size. Please let me know if there is any way I can help.
The Estate, Issue Five
By Matthew A. Quick Trusts
A Trust is a legal arrangement where one person (the “Settlor” or “Grantor”) gives legal title of property to another (the “Trustee”) to hold for the use and benefit of a third-person (the “Beneficiary”). The Settlor is the owner of the property that is to be placed into the Trust, thus becoming Trust Property. Trust Property can be money, stock, real estate or any other form of real or personal property. The Trustee is the person or entity (such as a bank) that agrees to maintain or invest the Trust Property for the use and benefit of the Beneficiary. It is common for a Settlor to also be the Trustee, meaning the person who creates the Trust maintains or invests the Trust Property for the use and benefit of the Beneficiary (so no one else needs to be nominated or hired as Trustee so long as the Settlor/Trustee is able to act). The Beneficiary is the person or entity for whom the Trust is created.
To create a Trust, the Settlor transfers ownership of property to a Trustee based upon certain terms and conditions that are listed in a Trust Declaration. The terms and conditions of a Trust Declaration are instructions that the Trustee is bound to follow in maintaining or investing the Trust Property.
In practice, when a Settlor is also going to be the Trustee, the Settlor will transfer property to himself as Trustee and select a person or entity to succeed him. Upon death or disability of the Settlor/Trustee, his successor will then become Trustee and follow the terms and conditions of the Trust.
There are three main reasons to employ the use of a Trust. First, a Trust keeps the Settlor’s estate from having to endure probate, as a Trust outlives the Settlor and can distribute the Settlor’s estate after his death. Second, a Trust can be used to gain significant tax-saving advantages by reducing the taxable portion of an estate. Last, a Trust can shelter property from creditors, loved-ones who cannot handle large amounts of money, and the government. Consider a Trust that regulates the amount of funds children receive or a Supplemental Needs Trust, which is a Trust used when one needs to retain eligibility for government benefits (specific trust arrangements will be discussed in future issues).
Trusts are a great tool to achieve one’s future planning objectives. If you seek greater control and protection of your property and its distribution, a Trust is the ideal utility to include in your estate plan.
-Seasonal Affective Disorder-
Now that the holidays have come and gone it can be hard to believe there is still a stretch of winter yet to endure—the cold, the snow and the bleak skyline. Referred to as the “winter blues,” it is common to feel the effects of the winter season on an emotional level. Moods may decline, frustration levels may rise, and a general sense of sadness may seem to set in. Symptoms of the winter blues tend to persist during the cold, dark months and dissipate with the arrival of the spring season. As with most aspects of mental health, it is important to differentiate between the experience of one or two symptoms during a brief period of time, and several signs and symptoms that persist on a more long-term basis. While some may experience a lighter level of the winter blues, others may be coping with a more serious condition known as Seasonal Affective Disorder (referred to as “SAD”).
According to the National Mental Health Association, SAD affects more than half a million people who live in environments of variable climate change. Common factors linked to the onset of SAD include sunlight depravation that alters our circadian rhythms (or internal biological clock) and an increase in the hormone melatonin (which is tied to symptoms of depression and actually rises during long-term exposure to darker environments). Also, a family history of depression may lead to a genetic predisposition for SAD and other depression-related symptoms.
Common signs and symptoms of SAD include frequent changes in mood, feelings of fatigue or apathy, and an overall decline in self-esteem. There can also be shifts in sleeping and eating habits, as well as a decline in social interest. Previously enjoyed activities that do not inspire the same sense of happiness can also be a noticeable symptom of SAD. Differentiating itself from other depression-related concerns, symptoms of SAD are relieved with the change in season and tend to return around the same time the following year.
Treatments for SAD include light-exposure therapy, melatonin-suppressing medications, and talk therapy with a qualified mental health professional. For anyone experiencing mild symptoms of SAD or winter blues, there are several ways to alleviate your symptoms at home. By taking a long walk once a day, you are exposed to fresh air and daylight that are key factors to the biological components of your symptoms. Also, increasing the levels of light in your home (via windows or additional light sources) can be extremely helpful. Talking to a trusted family member or friend can be very beneficial in creating an understanding of your thoughts, feelings and actions, which is important for both yourself and those who are close to you. In addition, setting time aside once a day to do something you enjoy, whether it is reading a book or going to the gym, can be crucial to increasing your overall sense of well-being during these long, dreary months.
If you observe significant signs and symptoms of SAD over the course of several winter seasons, it is recommended to discuss these findings with your doctor. Given that our mental health is equally as important as our physical health, awareness and appropriate decision-making in this area can greatly impact your friends, your family, and your future.
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Carly Quick is a licensed clinical social worker who practices at Lake Bluff Middle School in the northern Chicago suburbs and invites any questions or comments via email at carlyjacks@hotmail.com. More information on SAD can be found at www.nmha.org.
-Update-
Federal Deposit Insurance Coverage (“FDIC”) Has Been Extended. The standard insurance amount for FDIC of $250,000 was set to expire January 1, 2010, but has been extended until December 31, 2013. On January 1, 2014, the amount will return to $100,000 for standard insurance. The $250,000 amount is permanent, thus will remain viable after January 1, 2014, for certain retirement accounts, which includes IRAs. For more information on the amount and applicability of Federal Deposit Insurance Coverage, please visit www.fdic.gov.
Michigan Enacts Smoking Prohibition. Beginning May 1, 2010, it will be unlawful to burn any matter or substance that contains a tobacco product in an enclosed, indoor public area. The new Act, which can be found after it takes effect at MCL 333.12601, et seq., and MCL 333.12905, et seq., will continue to allow smoking at cigar bars, tobacco specialty retail stores, and the gaming area of casinos, but only if these entities are in existence at the time the law takes effect.
-Conclusion-
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding special needs planning and estate planning are provided free to groups of any size. Please let me know if there is any way I can help.
Bond Holders and Condemnation (Illinois)
By Matthew A. Quick In City of Chicago v Prologis , Tax Increment Financing Bonds (commonly known as "TIF Bonds"), which are created to finance current municipal improvements and are repaid on the tax gain resulting from the improvements, were used to redevelop land bordering O'Hare Airport. The City of Chicago filed a condemnation action to take the property upon which the TIF Bonds had been levied in order to expand the airport. Several parties that held TIF Bonds brought an action to determine the bondholder's stake. The Court held that any loss in a TIF Bond's value resulting from a condemnation proceeding is a consequence of a lawful taking by the government, therefore those holding TIF Bonds are not eligible for just compensation. The Court further opined that those holding the TIF Bonds may not have known of this particular airport expansion, however, the holders of the TIF Bonds could have reasonably foreseen that property bordering airport could have been taken for future airport expansion.