Elliott S. Topkins Massachusetts Real Estate and Title Atty

As I have evolved from an attorney who sat in my office and waited for the phone to ring into a realist who started to understand that marketing is an essential part of doing business, one thing became clearer and clearer. My best efforts involved finding motivated and talented realtors and mortgage originators with whom I could work on a regular basis.

This "Resource Triangle", as I like to call it, makes perfect sense. All three professionals involved have one goal in mind, the successful closing of a residential real estate closing. All three have something else in common: if the transaction does not close, none of us gets paid. So if a realtor in one of my Triangles calls me up late on a Saturday afternoon and tells me she or he has a Buyer who is leaving town this evening, can I come by and introduce myself, I need to appear even if it means my Saturday night plans are delayed, or even cancelled. The same availability is required from the mortgage professional. If we are going to be "Resources" and part of the Triangle, we need to be there, any time, any place.

Once the Triangle is established, it can work to everyone's advantage. The reliability component is huge. Whe I tell my realtor-partner, I can turn the Purchaser and Sale around in no longer than 48 hours, and I DELIVER on my promise, he or she knows that the chances of the deal coming together are increasing at a rapid pace, and what may have looked like "bragging" was only describing a standard that he or she knew could be achieved. When the mortage originator promises a full-blown mortgage commitment in fourteen (14) business days, AND DELIVERS, comfort and credibility abound. When I promise a client who owns a home, and is buying another, that my realtor-partner can get their present residence sold in less than a month, AND DELIVERS, I look good, my realtor-partner looks good, and the magic word "closing" is that much closer.

I have been fortunate in that I have developed several unique Triangles in my practice, the difference in make up and composition being a function of the clients I am working with and geographic compatability. The networking groups I am involved with, such as BNI, are a natural source for Triangles.

Most of the people reading this post are Triangle-eligible. They fit into one of the three (3) categories described. I urge each and every one of you to get your Triangles in motion at the earliest possible opprotunity. The confidence in referring your most trusted clients and customers to people who have time and again DELIVERED can make all the difference for you. You will no longer be a face in the crowd. You will be the one person who can make the deal happen

Strangly enough, after more than forty years of doing residential closings, I cannot remember one closing which was perfect in every way. My state, Massachusetts, still has lawyer's serving as closing agents and also reviewing the title and writing the title insurance. This means that my firm, Topkins & Bevans, is responsible for checking at the appropriate registry to make sure that the Seller really owns the property, and there are no liens which cannot be paid off, or accounted for, at the Closing. We also need to check on water and sewer charges, and other muncipal liens (such as property taxes) and common area fees, where a Condominium Unit is involved. Once we recieive the rest of the "figures" from the Lender, we produce a HUD-1 Settlement Statement and distribute same to the Buyer and Seller, most of the time at least 36 hours prior to the Closing

There are a lot of balls up in the air, and our job is to try to assemble all of the players, and have each of them walk away with the thought that they had been well attended to, and fairly treated. So, in a perfect world, these are the goals, which I would always try to attain in my "perfect closing":

1. The Buyer. Buyers are almost always nervous, whether this is their first, or twenty-first, purchase. My job is to make them calmer. I do this by being prepared for each closing. The Form 1003, whcih is a part of the Lender's closing package, is packed full of information. I can find out the age of the Buyers, how many kids they have, what they do, and where they work. This almost always leads to a comment like:"Oh, you are a nurse, my sister-n-law is a nurse.What is your specialty?" or "Oh, you have four children, I have four children, where are they at school?" Get the picture!!! I have identified something I have in common with the Buyers. I am a human being, too, not a robot who is there to make sure they do not purchase the home of their dreams. I tell my Buyer at the start that I will take as much time as they wish going over, and explaining, the HUD-1. I tell them that this is really the most important part of their closing. The numbers on the HUD-1 help them to establish an "opening balance sheet" for their home. I nver try to rush closings; ths is a big moment for the Buyers, and I want them to relish it. Whenever possible, I take a picture of the Buyers with my digital camera after the Closing and send it to them with an email. I want them to have a memory of their "big day"

2. Sellers. Sellers have feelings, too. I tell them that I will explain the HUD-1 to them as well, especially if they do not have an attorney present. I try to move the closing along so the Seller is not inconvenienced.

3. Realtors. Most realtors come to closings. I try to involve them in the proceedings as much as they wish. I will ask their opinion on certain issues, and assist them by having an extra copy of the HUD-1 available for them to take with them. Lately, I have been trying very hard to make sure that Seller's Agent, or the Buyer's Agent, gets paid from my Client's Account at the closing. These people have worked as hard as the Listing Agent for their commission, and there is no reason to make them wait additonal weeks to be paid.

4. Mortgage Professionals. Most of my Originators do not attend the closing. I think they should but they do not. Since they are not there, I ALWAYS call or email them after the closing is completed. I tell them just how the closing went, and if the closing went especially well, I urge them to contact the realtor(s) or Buyers to inquire. The positive reinforcement the originator receives may be helpful for future referrals.

If I can do all these things every time, my closings will be perfect.I am not there yet, but at least I know what I am shooting for. I would be interested in heaing from any of you with helpful hints as to how I can make my closings better. I used to have a slogan "my closings close". That is an important statement, but I would rather be able to say "My closing closed, and I enjoyed they way I was treated".

One of the functions of an attorney representing a Buyer of a Condominium is to review the financial statements and operations of the Condominium, as well as the constituent condominium documents such as the Master Deed and the Condominium Declaration of Trust. In a future post, I will delineate what I look for in the Condominium Documenta. This post, however, concerns the important information which can be gleaned by doing a careful review of the Condominium Financial Reports, and Minutes of Trustees, and asking some questions of the Condominium Trustees, either directly or through the Selling Agent or Buyer's Agent, as the case may be.

1. Condominum Statement of Operations

a. Look at ALL of the captions, especially Repairs. Do the Repair costs seem high? If they are more than a few hundred dollars, more information is needed. Is the Condominium "patching" where they should be making capital improvements? Will the new Buyer be required to pay for prior problems? Higher than normal Repair costs can tell you about how carefully the Condominium has been managed. See if the Condominium has a caption for "Accounting" and "Legal". If there is none, that may be a danger sign. The Trustees may be "winging it" on decisions where they need professional guidance.

b. See whether the income received represents payment in full from all units for the entire year. If that number does not compute, there are almost always delinquencies for common area fees. Massachusetts Condomionium law ( and most other jurisdcitions, too) gives the Trustees broad powers to start litigation for common area fees. The cost of same, including attorneys fees, is to be borne by the delinquent Unit Owner. If there are delinquencies, it may mean that the Trustees, for one reason or another, are not making real efforts to collect what is due from their neighbors. That is a danger sign for a potential Buyer, and could signal probelms down the road.

c. If possible, obtain Financial Statements for more than one year. Carefully analyze the receipts section. If the number is consistently on the rise, it means that the Trustees are constantly raising the comon area fee. Find out what the reason for that has been. If there is a pattern of loose or sloppy management, it may manifest itself in continuing increases in the common area fee.

2. Condominium Balance Sheet

a. Look for how much is in the Reserve Account. While many Condominiums have taken a "pay as you go" approach to improvements, make sure that a Rserve Account is, at least, in existence. In most states, Trustees are required to maintain an Operating Account and a Reserve Account. If there is no Reserve Account at all, the Trustees are not adhering to their statutory responsibilities. Perhaps, they are not adhering to other provisions of the Condomium law, as well.

b. See if there are any Accounts Receivable on the Balance Sheet. If there are, they are more than likely from delinquent Unit owners. Inquire as to the status of collection efforts. If they have not begun, that is a red flag for poor Condominium Management.

The other thing I always ask to see are Minutes of the Trustees for at least the prior Eighteen (18) months. If none exist, or if the Trustees do not regularly meet, there may be problems. I try to ask why. If there are Minutes, i look at them for any indication that a Special Assessment may be coming. This can be an unpleasant surprise for my client, and when I know a Special Assessment is "right around the Corner", I can sometimes request that the Seller bear some of the cost thereof. Depending on whether the Special Assessment is forward (something new that really is not the Seller's issue) or backward (a repair of a roof or other important constituent common area part) I have had some success in requests for contribution.

A qualified personal residence trust (QPRT) is an irrevocable trust that holds no assets other than (1) an interest in one personal residence of the trust donor and (2) certain other related assets. The purpose of a QPRT is to save estate taxes for the donor's descendants. When an individual gives his residence to a QPRT, he makes a gift to his descendants but also holds something back. The donor reserves the right to continue to occupy the residence for a certain period of time (the QPRT term). When the term expires, ownership of the residence will pass to the remainder beneficiaries of the trust. Typically, the QPRT also provides that, if the donor dies before the end of the QPRT term, the trust terminates and the residence reverts back to the donor's estate. (Note that if the donor dies before the end of the term, in effect, the trust would be cancelled and will not have produced any tax savings.)

Example: Abby is a widow in her mid 60s with four adult children. She decides to put her residence (a condominium worth $1 Million) into a QPRT. The trust provides that Abby may continue to live in the condo rent-free for the 15 year term of the trust. During that time, Abby is the sole trustee of the trust, and continues to pay all expenses of the condo, so for the next 15 years, her living arrangements do not change. If Abby decides to sell the condo, the sale proceeds will belong to the trust. In that case, the trust can either reinvest the proceeds in another residence for Abby to live in, or pay Abby a cash annuity for the balance of the 15 year term. At the end of the 15 years, if Abby is still living, things will change. At that point her children become the "beneficial owners" of the trust. Abby will continue as trustee, and she will still have the option to live in the trust-owned residence, but she will have to start paying rent to the trust just as any other tenant world. The rent will flow though to her children as trust beneficiaries. Because Abby has made a gift to her QPRT, she must file a gift tax return that year. Even though the condominium she gave away is worth $1 Million, the value of her gift, for gift tax purposes is only about $300,000.00. There is no gift tax payable because her gift is less than her lifetime gift tax exemption amount ($1 Million). Another woman, Betty, does no estate planning. She also owns a condominium worth $1 Million. Because the federal government is thinking about repealing the estate tax, Betty is going to "wait and see" if the estate tax is going to go away. In 25 years, Abby and Betty die. It turns out the estate tax was not repealed. Both woman's condominiums appreciated about four percent per year and are worth $2.6 Million each. Betty's condominium is included in her estate for estate tax purposes, and adds about $1.2 Million to her children's estate tax bill. Abby's condo, though, is out of her estate; her children own it without paying any estate tax).

The donor gets a discount, in computing the value of her taxable gift, for the interests she retains. The discount represents the donor's retained interest to live in the residence. After all, in the above example, the donor's children have to wait 15 years to receive the residence, so they are not receiving $1Million right away. It's as if the donor only gave them part of the residence; she kept part of it for herself, so she doesn't have to pay any gift tax on that part because she didn't give it away. The other discount received in computing gift taxes is a discount for the donor's retained reversion. The donor retains the right to get the property back (i.e., to have it come back into her estate, where it could be used to pay her debts or where she could change her mind about who to leave it to) if the donor happens to die in less than 15 years. Because of these discounts, the donor pays gift tax on only a fractional part of the residence's value. Yet if the donor survives for 15 years, the entire asset is out of her estate, not just the fractional part she paid gift tax on. Note that if one of the donor's children does not survive the QPRT term's end, that child's issue would not receive a share of the QPRT, the trust would pass only to the donor's living children.

The IRS taxes gratuitous wealth transfers, whether made during life (gift tax) or at death (estate tax). There are only a handful of ways that an individual can reduce his estate tax. Most involve reducing the size of the estate through non-taxed transfers such as spending, use of gift tax exclusions and exemptions, and various nontaxable gifts. The Internal Revenue Code taxes the "value" of what is transferred. The general rule is that an asset is valued at its "fair market value". With real estate, an appraiser must be hired to create an appraisal based on similar assets in allegedly similar circumstances, and using methods that would be used by a hypothetical person wishing to buy the property in question. The fact that we are experiencing a current "depression" in real estate values makes today an optimal time for you to set up your own QPRT or suggest setting one up to your clients and friends. The IRS's method of valuing interests that last (or are delayed) for a term of years, is to discount future dollars to their present value using a prescribed interest rate.

Example: Consider a sum you are investing-say $100,000-, start with the fund that will exist at the end of the term of years and work backwards in time, dividing each year's value by one plus the interest rate (say six percent, so 1.06). By knowing the size of the future fund, and what rate of return you seek, and how long you will have to wait to get that future fund, you can figure out the present value of that future asset. The interest rate (or discount) rate to be used for valuing partial interests for federal and estate gift tax purposes is prescribed by the Internal Revenue Code ("Internal Revenue Code Rate"). The rate is published monthly.

If a trust holds a residence, and the current beneficiary is entitled to live in the residence rent free, the current beneficiary is called the "income beneficiary" and is still said to have the income interest in the trust, or the right to the trust's income. The property may not generate any actual "income". However, the right to use property (for example, the right to live in a house) is considered the equivalent of the right to receive the income of that property and is valued the same way. When the trust eventually ends, the property leaves the trust and is distributed to people who hold the "remainder interest". Those people are called the "remainder beneficiaries" or "remaindermen". The valuation discount for a QPRT gift increases along with interest rates. When the Internal Revenue Code Rate is high, the effect is to depress the value of the remainder interest relative to the value of the donor's retained income interest, thus producing a lower value for gift tax purposes. When the rate is lower, the gift tax value of the remainder becomes correspondingly higher, and the transaction is more expensive.

The IRS ignores the fact that an asset may appreciate or depreciate in value. When a donor gives a donee through a QPRT, the right to own a residence in five years, the IRS assumes that the residence will be worth the same $100,000 in five years that it is worth today. If the donor believes that the residence will be worth $1Million in five years, the donor will see the delayed-gift as a transfer tax bargain, because the appreciation will pass to the donee transfer tax-free.

The other discount is for the grantor's retained interest. The IRS starts with the value of the residence, then deducts from that amount the value of the donor's retained income and reversionary interests. To calculate the value of the contingent reversion (i.e. Sam gives her property to a QPRT. Sam keeps the residence "for ten years or until her death." At the end of the 10 years, if Sam is then living, the trust property passes to Joe. If Sam dies before the end of the 10 years, however, the trust reverts to Sam's estate. Sam has a contingent reversion in the residence), the IRS looks at the entire population of people in Sam's age in the US and computes the probability that Sam will be alive in 10 years. If Sam is young, there is a high probability that Sam will still be alive in 10 years. In that case there won't be much of a discount for Sam's reversion, because the IRS considers it unlikely that Sam will get the property back. On the other hand, if Sam is older, there will be a higher probability that Sam will not be alive in 10 years, so there will be a large discount for Sam's reversion; the IRS considers it more likely that Sam (through her estate) will get back control of the property.

Negatives:
1. The QPRT does not save taxes unless the donor survives to the end of the QPRT term;
2. Because of the way the generation-skipping transfer tax works with QPRTs, there is a strong incentive to have the trust property pass only to the donor's living children, and, if a child of the donor dies during the QPRT term, provide for that deceased child's issue with other gifts or bequests (outside the QPRT);
3. Donor must pay rent to occupy the premises following the term;
4. Low tax basis, mortgage, other factors may reduce savings;
5. Loss of control and flexibility-The QPRT is an irrevocable parting with control of the property; and
6. Transaction costs

In 2009, the federal estate tax exemption is $3,500,000.00. Next year it is slated to disappear for one year. However it will apply full force for deaths before or after that year (with, in 2011 a top bracket of 55% and an exemption of only $1 Million). Whether Congress will ultimately repeal the estate tax, or if the estate tax remains in effect what the exemption amount would be, is anyone's guess. If the potential donor believes that the estate tax is likely to become extinct during his lifetime, or to remain in effect with such a large exemption that the potential donor's estate will not be subject to the tax, the potential donor should not put his house in a QPRT. There is no advantage to it. On the other hand, if the potential donor believes that there is a high likelihood that the estate tax will be with us for the foreseeable future and that his or her assets are likely to exceed the amount of any exemption that Congress is likely to set, the potential donor should continue taking all available estate tax-lowering measures, including placing residences in QPRTs.

Like any tax-involved transaction, the particular benefit of a QPRT is best explained by your attorney or other trusted adviser. The purpose of this post is to alert you to the existence of QPRT's, so that you might consider their use in your future planning.

1031 Exchanges, tax deferring transactions much used in our Western states, are moving east, and you should know more about them, if you own any kind of investment real property. In the landmark Starker decision in 1979, the United States Supreme Court substantiated the validity of the delayed exchange process. Prior to that time, the courts had never sanctioned an exchange whereby the relinquished property was sold and at a later date, replacement property was purchased. What this means to you as an owner of investment property, is that you can dispose of property in which you have sizable gain, but perhaps the headaches of management, and replace the old property with a different more manageable property, or even an ownership interest with others, in new property.

If done correctly, a 1031 Exchange can permit an investor to defer tax due in connection with the sale of real property, enabling the investor to consolidate, diversify, leverage or relocate her investment. Fortunately, in 1994, the Internal Revenue Service promulgated "Safe Harbor" regulations which provide the steps to take to make sure a 1031 Exchange produces the desired tax deferral. At Topkins & Bevans, we have always advised our exchanging clients to use a Qualified Intermediary which is affiliated with a Title Insurance Company. There have been some problems with intermediaries absconding with funds in the past, but never, ever, have there been problems with the Company we work with, OREXCO, an affiliate of Old Republic Title Insurance Company. In myriad transactions, we have been most satisfied with the level of expertise, service and financial integrity provided by that organization. OREXCO is best reached locally by contacting Lynne Bagby, the New England Regional Account Manager, at lbagby@ortc.com.

The key to a successful Exchange is identifying replacement property in a timely manner. It is essential that the investor locate "like-kind" property. Generally, real estate is like kind to all other real property, except foreign real property, as long as it is held for investment or the productive use in a trade or business. There is a 45 day time frame in which the investor must "identify" replacement property. Identifying the property on a timely basis is not all that must be done. It is also essential to "close" on the identified property in or within no longer than 180 days from the sale of the subject property. The 45 and 180 day periods are calendar days. There is no grace period if the day in question falls or a Saturday, Sunday or holiday.

Even if you own property with another investor, you may be able to exchange property if he or she does not wish to. In this type of transaction, you must clearly indicate and allocate each investor's interest in the property before you sell. The investor who wishes to exchange may do so, and the other investor may receive cash (taxable). It is, of course, very important that the investors be clear on their intentions before entering into an exchange agreement with the Qualified Intermediary. Once a relinquished property is closed where all exchanging properties are under one exchange agreement, the exchangers do no have an option of dividing proceeds and buying separate replacement properties.

It is also possible to enter into an exchange transaction where part of the tax is deferred and a portion recognized as taxable gain. If the equity in your investment property is $150,000,00, and you wanted to use only $100,000.00 to purchase your investment property, and take $50,000 out to buy a new car, you would have a partially tax deferred exchange. The $50,000 you took to purchase the car is considered taxable cash "boot".

Even is you live in one apartment, in the three family dwelling you own as an investment, you may be able to utilize a tax free exchange for the other two units. That type of approach works out extremely well if you are converting the investment rental property into condominiums for sale to third parties (See my previous post on this type of advantageous transaction). The unit you live in is sold as your principal residence, and you are eligible for the tax exclusion permitted for the sale of your principal residence where you resided for at least two of the last five years. The other two units can be sold as part of a 1031 Exchange, as long as the percentage of the value of the property is consistent with your past tax returns. This is a somewhat complicated area, and you should consult your tax advisor with regard to the particular aspects of this type of 1031 Exchange transaction.

I would be more than willing to communicate with you, and your tax advisor, to discuss any type of 1031 Exchange which you may be interested in. You should also feel free to contact Lynne Bagby at OREXCO for assistance. Our firm has enjoyed an extremely positive relationship with OREXCO and drawn much of the materials for this post from information furnished by OREXCO. If you use a sold, reputable company like OREXCO as your Qualified Intermediary, you will have little, if any, risk about the safety of your funds. In these days of uncertainty, selecting the "right" Qualified Intermediary is more important than ever.

TOPKINS & BEVANS is a mid-sized suburban Boston law firm, with offices located in Boston, Waltham and Braintree. Elliott Topkins, the senior partner in the firm, has more than 35 years of experience in real estate and estate planning matters. He is best reached at etopkins@topbev.com.

1031 Exchanges, tax deferring transactions much used in our Western states, are moving east, and you should know more about them, if you own any kind of investment real property. In the landmark Starker decision in 1979, the United States Supreme Court substantiated the validity of the delayed exchange process. Prior to that time, the courts had never sanctioned an exchange whereby the relinquished property was sold and at a later date, replacement property was purchased. What this means to you as an owner of investment property, is that you can dispose of property in which you have sizable gain, but perhaps the headaches of management, and replace the old property with a different more manageable property, or even an ownership interest with others, in new property.

If done correctly, a 1031 Exchange can permit an investor to defer tax due in connection with the sale of real property, enabling the investor to consolidate, diversify, leverage or relocate her investment. Fortunately, in 1994, the Internal Revenue Service promulgated "Safe Harbor" regulations which provide the steps to take to make sure a 1031 Exchange produces the desired tax deferral. At Topkins & Bevans, we have always advised our exchanging clients to use a Qualified Intermediary which is affiliated with a Title Insurance Company. There have been some problems with intermediaries absconding with funds in the past, but never, ever, have there been problems with the Company we work with, OREXCO, an affiliate of Old Republic Title Insurance Company. In myriad transactions, we have been most satisfied with the level of expertise, service and financial integrity provided by that organization. OREXCO is best reached locally by contacting Lynne Bagby, the New England Regional Account Manager, at lbagby@ortc.com.

The key to a successful Exchange is identifying replacement property in a timely manner. It is essential that the investor locate "like-kind" property. Generally, real estate is like kind to all other real property, except foreign real property, as long as it is held for investment or the productive use in a trade or business. There is a 45 day time frame in which the investor must "identify" replacement property. Identifying the property on a timely basis is not all that must be done. It is also essential to "close" on the identified property in or within no longer than 180 days from the sale of the subject property. The 45 and 180 day periods are calendar days. There is no grace period if the day in question falls or a Saturday, Sunday or holiday.

Even if you own property with another investor, you may be able to exchange property if he or she does not wish to. In this type of transaction, you must clearly indicate and allocate each investor's interest in the property before you sell. The investor who wishes to exchange may do so, and the other investor may receive cash (taxable). It is, of course, very important that the investors be clear on their intentions before entering into an exchange agreement with the Qualified Intermediary. Once a relinquished property is closed where all exchanging properties are under one exchange agreement, the exchangers do no have an option of dividing proceeds and buying separate replacement properties.

It is also possible to enter into an exchange transaction where part of the tax is deferred and a portion recognized as taxable gain. If the equity in your investment property is $150,000,00, and you wanted to use only $100,000.00 to purchase your investment property, and take $50,000 out to buy a new car, you would have a partially tax deferred exchange. The $50,000 you took to purchase the car is considered taxable cash "boot".

Even is you live in one apartment, in the three family dwelling you own as an investment, you may be able to utilize a tax free exchange for the other two units. That type of approach works out extremely well if you are converting the investment rental property into condominiums for sale to third parties (See my previous post on this type of advantageous transaction). The unit you live in is sold as your principal residence, and you are eligible for the tax exclusion permitted for the sale of your principal residence where you resided for at least two of the last five years. The other two units can be sold as part of a 1031 Exchange, as long as the percentage of the value of the property is consistent with your past tax returns. This is a somewhat complicated area, and you should consult your tax advisor with regard to the particular aspects of this type of 1031 Exchange transaction.

I would be more than willing to communicate with you, and your tax advisor, to discuss any type of 1031 Exchange which you may be interested in. You should also feel free to contact Lynne Bagby at OREXCO for assistance. Our firm has enjoyed an extremely positive relationship with OREXCO and drawn much of the materials for this post from information furnished by OREXCO. If you use a sold, reputable company like OREXCO as your Qualified Intermediary, you will have little, if any, risk about the safety of your funds. In these days of uncertainty, selecting the "right" Qualified Intermediary is more important than ever.