Rehabilitating Properties: Does your entity of choice protect you?

Author: Eric Townsend

First of all, if you’re saying to yourself, “this doesn’t apply to me, I never chose any entity”, you are exactly my target audience. More investors are returning to the business of buying properties to rehabilitate and resell (flip). These can be profitable endeavors as prices seem to have bottomed. Unfortunately, many of these investors are purchasing these properties with other investors and using agents (like contractors) to do some of the repairs and work without consideration of the entity in which they operate. This could leave these investors open to immense liabilities because they did not take a few simple steps to form an entity providing them limited liability.

In California the default entity when a person does business with another, without forming a recognized entity by the State, is a general partnership. This means that the person is generally liable to any creditor for the actions of any of the general partners or agents who are acting on behalf of the general partnership. If a partner or agent accepts credit from a lender, or is found liable in a civil action for injuries that arose from the actions of a partner/agent while acting on behalf of the general partnership, then those creditors may seek their damages generally from all partners.

A simple example, a General Partnership “GP”, made up of Partners A, B, and C, hired a contractor as their agent to install a new roof on a property they intended to rehabilitate. Partner A had only contributed $5,000 to the GP, which was used as the down payment to buy the investment property. B and C had contributed $10,000 each to hire a contractor to fix the roof. When installing the roof, the contractor did not fully latch the mechanism to secure the a-frame structure. Half-way to the desired location, it fell upon an unsuspecting victim V. The V was unable to work again and was awarded a judgment of $250,000 in damages. In this case the GP would be liable for these damages (i.e., the injured party can seek these damages from any and all of the general partners including judgment liens on their personal property). Partners B and C had no personal assets for the V to go after, but A had a property worth $250,000 that was owned free and clear. So a lien was placed on A’s property and then sold to pay off the judgment. A then sought contribution from B, C and the contractor for the $250,000 and prevailed in that action. Unfortunately, the following month B, C and the contractor declared Chapter 7 bankruptcy and the general partners’ claim against them as judgment creditors was liquidated. For a $5,000 investment A lost his home.

Could this have been avoided? The answer is absolutely! Anyone who registers a business with the Secretary of State of California in a recognized limited liability entity under California Code, and operates legally under that business name, is only liable for their own acts and the amount of money they contribute to that business. So had A instead decided to form a LLC or corporation, his maximum liability in the above example would have been the $5,000. Is it worth it to spend the time, cost, and effort to limit your liability? You be the judge.

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Internships: Who do they really benefit?

Author: Alisa Vanegas - Intern

There tends to some confusion regarding internships. Are they employees? Volunteers? Well, it all depends on how you handle it.

Employees are defined as someone in a contract with the employer who receives compensation for a service or ‘job’. They must qualify for employment in the United States and file all appropriate forms. Employees are entitled to things other than basic compensation or ‘pay’. They may also qualify for certain other benefits, such as workers’ compensation and overtime pay. Thus, when asking, who does it really benefit; employment benefits both the employer and the employee.

On the other hand, an intern is ultimately a ‘trainee’ or ‘student’. Just like a student is not considered an employee of the school they went to, an intern is not considered an employee in the workplace because they are there to learn. One of the biggest factors of an internship is that the agreement between the employer and the intern is for the intern’s benefit, not the employer’s. An intern works under close supervision, learning general skills that will benefit them in future schooling, programs, or employment. Giving such supervision may impede the business, take up the supervisor’s time, and only adds to the interns skills.

Even if this is the setup of the relationship between the intern and the employer, there are certain rules that Employers must be aware of when accepting someone for an internship. The Department of Labor has released 6 guidelines that determine whether someone is an intern or an employee, and there are as follows: 1. The internship is similar to training that would happen in an educational environment; 2. The internship experience is for the benefit of the intern; 3. The intern does not displace regular employees, but works under close supervision of existing staff; 4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded; 5. The intern is not necessarily entitled to a job at the conclusion of the internship; and 6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

In addition to these guidelines, the California Division of Labor Standards Enforcement (DLSE) has added to these guidelines with a few more of their own, which are subject to enforcement for employers here in California. They are: 1. The training should be part of an educational curriculum; 2. The students should not be treated as employees for such purposes as receiving benefits; 3. The training should be general in nature, so as to qualify the students for work for any employer, rather than designed specifically as preparation for work at the employer offering the program; 4. The screening process for the program should not be the same as for employment; and 5. Advertisements for the program should be couched in terms of education rather than employment.

These guidelines have helped determine the true difference between employees and interns. While an internship should be for the sole benefit of the intern, these guideline help protect the employer from any potential wage claims, penalties, insurances, or other complications.
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The Apollo Mission

The Apollo Mission
January 27, 2011
Author: Dustin Wetton

Did you know that the moon is only 223,000 miles away when it is closest to the earth? I did know this, for I recently tried to make it there. Yet sadly, as of yesterday, after eight years of traveling, my mission failed. With only 400 miles to travel, my epic journey came to an abrupt end. My vessel on its voyage to the moon was struck by a moving object, thus resulting in its ultimate demise and termination.

While I was not traveling in a spaceship, or actually even leaving the ground, I really was on a mission to travel the distance to the moon. My vessel was a 1999 Toyota 4Runner named “Myrtle.” Myrtle was hit while parked on the side of the road by a negligent driver, causing damage that resulted in it being a total loss. With 222,600 miles on the speedometer, she was unable to reach the moon before she had to be put down. Yet on her way to the moon, Myrtle was able to travel through beautiful cities such as Santa Barbara, San Diego, and Honolulu. While the mission failed, it was a great adventure none the less.

In getting in a car accident, there are many steps that you should take to ensure that you are best protected. First, make sure you gather all of the information from the other persons involved. You will need names, addresses, phone numbers, place of work, drivers license number, and all of their insurance information. Be sure to get the insurance company and policy numbers. If they are not insured, or if you notice that the insurance is past dated, be sure to get even more information than normal as to ensure that you will have some sort of coverage or ability for indemnity. Also, be sure to get all the vehicle information, such as the make, model, color, and license plate number and state. Pictures of the scene are also very helpful, and many insurance companies can have these uploaded to their claims.

Lastly, be sure to call the police and ask for an accident report. Sometimes the police will not respond to a fender-bender, but anything else they will most likely come out and write an accident report. These bits of evidences are highly valued and have much weight in determining fault for insurance companies. If there are any injuries, you should probably go to the hospital. The idea is to get as much documentation and dependable records as possible to ensure that all of your rights are protected. Also, witnesses and their information are valuable. It is also important to remember that insurance is just the first step; you may also have a legal claim and could seek the advice of an attorney who may be able to protect your rights more than insurance is able to.

In conclusion, if someone ruins your ability to get to the moon, make sure that you are as best protected as possible by being a good evidence gathering patron. Myrtle will be missed, but she at least proved once again that it is the means, and not the ends, that brings true happiness.

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New Bill Provides Temporary Relief for the Estate Tax

Author: Dustin Wetton

On December 17, 2010, President Obama signed into law H.R. 4853, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This important tax extenders bill includes federal tax changes for individuals, businesses, and estates at all levels of income. One of the most important facets of the bill is the part concerning the estate and gift tax.

The deadline for revamping the estate and gift tax was the first of January, 2011. Thus, if no action was taken by Congress, the estate and gift tax laws would be restored to their 2001 levels. If that would occur, the amount that is exempt from estate taxes would be $1 million, and the tax on the rest would be 55 percent. Thankfully though, Congress took action. In this recent legislation signed into law only 13 days before the deadline, congress provided temporary estate tax relief and a modification of the gift and generation-skipping transfer taxes.

To sum up the recent changes that affect the estate tax, the new law has a higher exemption and a lower tax rate. The new legislation sets the estate tax exemption at $5 million per person and $10 million per couple. Thus, if you are an individual, you will not be taxed on up to $5 million of your assets upon your death. Therefore you are able to actually give out to others the inheritance that you had planned for them. Also, there is a top tax rate of 35 percent for the estate, gift, and generation-skipping transfer taxes for two years, through 2012. Thus, if you are an individual with more than $5 million in assets at your death, then anything over the exemption amount will be taxed at a top rate of 35%. Lastly, the proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

A new tool is granted for estates of decedents dying after December 31, 2010. Under current law, couples have to do complicated estate planning to claim their entire exemption. Yet now, under this new legislation, a couple is allowed to transfer any unused exemption to the surviving spouse without any need for a planning instrument to dictate otherwise. Thus, the first spouse to die can use an estate plan that takes little to no taxes out of their estate, while also protecting the surviving spouse from heavy taxes upon their death.

Lastly, the new bill once again reunifies the estate and gift taxes. Prior to the 2001 Bush tax cuts, the estate and gift taxes were unified, creating a single rate schedule for both. This was subject to repeal if Congress took no action. Luckily though, the recent bill unifies the estate and gift tax once again. The bill is effective for gifts made after December 31, 2010.

With all of the new changes taking place, it is a good idea to use the inspiration of Congress’ action to take action yourself. Check your estate plans to ensure that you are in line with recent changes and that the language in your will or trust allows you to take advantage of the beneficial changes that have just come into affect.

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Home Values and Rising Home Mortgages Rates

Author: Eric Townsend

Over the last couple of years the interest rates on home loans have been at historic lows. In recent weeks we have seen those rates rapidly rise. Those considering selling or buying a home are left wondering how rising interest rates will affect the value of homes. Here is a brief synopsis of how these changes could affect the value of housing.

Home values reflect supply and demand. Increases in supply cause prices to drop while increased demand cause prices to increase. To understand the effect of interest rates we must first understand what supply and demand is.

Supply of homes come from those willing to sell property including private home owner through a regular sale or short sale, banks with foreclosed properties, and also from owners/investors waiting on the sidelines for the right price at which to sell. Of these sellers, short sales and foreclosed properties account for the bulk of sales.

Demand for homes come from the aggregate amount everyone in a market is willing to pay for that supply. This aggregate amount is based on wages, levels of employment, availability of credit and the interest rates associated with that credit, and society’s sentiment regarding the strength or weakness of the economy in general.

So today when we look at supply and demand there are a few things we notice right away. First, supply is remaining constant. We still have several months of inventory, but that inventory remains relatively constant. With a constant inventory that is not increasing the effect of supply on the market should be nominal. Second, demand is also relatively constant. Wages and levels of employment are not going up or down either and recent surveys of consumer sentiment about the economy are improving slightly. The one thing that is not remaining constant is interest rates.

With interest rates being the one factor affecting home prices we must look at how those interest rates change the demand curve. To show the effect of rising interest rates we will use the example of the average demand (D) who is looking to buy a home. Let’s assume that the amount D is able and willing to pay is $1,340/mth. At a 5% interest rate D can buy a $250,000 home. At a 6% interest rate D can buy a $223,000 home, which means the value of the home that he can afford is $27,000 less. This is roughly a 10% drop in the value of that home. If rates rose 2% and D bought a home at 7% interest he could only afford a $200,000 home, which is roughly a 20% drop in the value of that home.

So with everything remaining approximately constant we could expect home values to level off. Unfortunately, interest rates have begun increasing. Home mortgages are based on 10 year Treasury Bonds and the rates on those bonds having increased from a low of below 2.5% just a few months ago to over 3.3 % today. With these increases mortgages rates have also begun to climb. With many new buyers subject to these higher rates principle home values should decline inversely.

On a brighter note, the effect of these higher interest rates is not reflected in values for several months. So if you are selling a home now is the time.

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Income Taxes and Bankruptcy

Author: Dustin Wetton

Ben Franklin once said that “the only things certain in life are death and taxes.” This quote can have many innuendos, one of which is that there is no way of getting out of paying for your taxes. However, during Mr. Franklin’s life, the United States had not yet setup a bankruptcy court or bankruptcy code. Thus, he was unaware of the ability to discharge federal and state income taxes through the bankruptcy process.

The bankruptcy code was initiated to help ease the burden of over-encompassing debt on debtors and to help create and protect the flow of credit. While most creditors are often credit-card companies, health industries, and lawsuits, in many cases, the federal and state governments are also creditors. In these situations, for whatever reason, the debtor owes their respected governments taxes, and thus is established a creditor-debtor relationship between the taxpayer and the government.

This situation is very common in bankruptcy. Yet because the creditor is the government, they have a very high priority of distribution and a more difficult burden of discharging their debt than most unsecured debtors. Thus, if you owe money on taxes from previous years, you can have your debt discharged, that is “wiped clean”, however the following six steps must be fulfilled in order to do so:

1)The due date of filing the return is at least 3 years ago
2)The tax return was filed at least 2 years ago
3)A tax assessment occurred at least 240 days ago
4)The returns are not fraudulent
5)The debtor is not guilty of tax evasion, and
6)The debtor must prove the past four years of filings had been filed.

These six steps must be followed to a tee in order to get the past years taxes discharged. If there are problems in qualifying for any of the steps, an attorney, the trustee, and the IRS are all very helpful in figuring if the debts can be discharged or not. Also, it may be a good idea to get a tax transcript from the IRS and the State for the tax years that you are going to try to discharge to make sure that your numbers are correct.

Quit First, Fired Later

Author: Dustin Wetton

During these difficult economic times, many of us are changing our employment status to seek better economic opportunities. Thus, some of you might be inspired to quit your job for whatever reason and seek employment elsewhere or just take time off. In doing so, lets say that you are respectful to your employer and you give them your 2 week notice. Yet, what happens if that employer is so insulted by you quitting that after you give your notice, they fire you instead. Does this mean you were fired or you quit? What happens if you only had one day left on your notice and they “let you go early?” Questions like these are often asked to employment law attorneys who are helping those recently unemployed receive unemployment benefits. However, I believe that the same logic can be applied to severance pay and other “benefits” of being let go from a job.

Unemployment benefits are normally only allowed to those that leave their job involuntarily. Meaning, if you quit your job because you wanted another job, or just wanted to, then you most likely are not able to receive unemployment benefits. Yet, under California law, if you give notice of your last day and your employer cuts that day short, then you are qualified as leaving involuntarily, even though you intended on leaving a couple of days, or weeks or months, later. If you give notice and they fire you prior to that notice date, “or let you leave early” then you are defined as being “fired” under California law.

In one case the Unemployment Appeals Board held that “the fact that a person may set a date for resigning from employment is not the controlling factor. The most pertinent consideration is whether the employee could have remained working for an employer on the actual date they left.” If they could have continued working, were willing and able to do so, but the employer was not willing them to do so, then they consider it as an involuntary discharge. Thus, if this would happen to you, then you would be eligible for unemployment benefits. Using this same logic, I believe it can also be argued that you would be entitled to the same benefits of severance pay and other “fire-triggered” benefits that are owed to you in regards to your employment contract. Thus, just because you were quitting, gave notice, and were “let go early”, you may still have certain important rights and decisions to make regarding how to handle any transition periods in your employment.