Law News and Tips

Title Insurance: A Primer (#2)

Fred Vilbig - Friday, June 12, 2015

In my first Title Insurance Primer article, I talked about how to delete what are called “survey exceptions” off of your title insurance policy. However, there are other standard exceptions to coverage in your title insurance. The purpose of this article #2 is to talk about those other standard exceptions and what you can do about them. In the third and last installment of this Title Insurance Primer that I will write, I will discuss the “special” exceptions that can be found in Schedule B of an ALTA policy.

One of the other standard title insurance exceptions that every ALTA title policy has is the exception for the rights of parties in possession. These would be tenants or squatters. If the property is owner-occupied, this shouldn’t be a problem. But if you are buying the property out of a foreclosure, then squatters in particular can be an issue.

To delete this exception, you need the ALTA survey (the surveyor will note whether he (or she) saw any evidence of people living on the property) and an affidavit from the owner. If you are buying the property out of foreclosure, the title company might give you some push back since the owner will probably be an absentee bank that doesn’t monitor the property, but you should insist on the deletion with the survey.

Another standard exception is for unrecorded liens. When work is done on property or materials delivered for construction, the “mechanic” (the one doing the work) or the “materialman” (the one delivering the material) don’t have to file a lien immediately. They have about 6 months before they have to file a lien. So you could buy the property and 5 ½ months later have a lien slapped on your property. That would be bad. The title company will delete this exception with an affidavit from the owner saying that they have not had any unpaid for work done on or material delivered to the property.

The last of the pre-printed exceptions is for unpaid taxes and special assessments. Once again, the title company will need an affidavit from the owner to delete that exception. In this affidavit, the owner will state that they have paid all of their taxes with respect to the property and that they haven’t received any notice of any special assessments.

The deletion of these standard exceptions is something that homeowners often neglect in regard to their title insurance policies. However, if they stay in your policy, your title insurance may not be as much protection as you may need.

In the next and last installment of this Title Insurance Primer, I will talk about what are called “special exceptions” from your title insurance policy.

TITLE INSURANCE: A Primer (#1)

Fred Vilbig - Thursday, May 21, 2015

With the residential real estate market beginning to heat up – well, maybe at least there seems to be a pulse – I think it’s important to give some thought to title insurance.

Whenever you buy a house (or any property), the bank is going to require you to buy title insurance. But why?

It’s not hard to imagine that there are crooks out there. People will try to sell you things they don’t own or that are not in the condition they represent to you. (You’ve heard the jokes about someone wanting to sell you the Brooklyn Bridge.) They may even be well-intentioned, but just misinformed. (Think of the stereotype of the used car salesman.)

What title insurance does is it gives you some assurance that the person selling you the property actually owns it and has the power to sell it to you. However, with a standard title insurance policy, you need to pay attention to what it doesn’t cover. You’ll find what the policy doesn’t cover in the Schedule B exceptions.

This is the first of three articles I am going to write regarding title insurance. In this first article, I am going to talk about the survey related exceptions from coverage. In the next article, I am going to talk about the other standard exceptions from coverage. In the third article, I am going to talk about what are called the special exceptions from coverage.

The Standard Exceptions are pre-printed on the standard ALTA title policy that just about every title company uses. ALTA is the American Land Title Association. One of the biggest exceptions is for encroachments, boundary issues, and other matters a accurate survey would disclose. Maybe the neighbor built his or her fence or driveway on the property. That would be a problem.

Another standard exception is for unrecorded easements. For instance, there might be a pathway across the back of the property that the owner agreed to but never publicly recorded.

Both of these exceptions can be deleted off a policy (unless there really is a problem) by getting a survey. But the kind of survey you’ll need is not just what we call a “drive-by” survey. A drive-by survey is where the surveyor just looks at the recorded plat of the subdivision in the County Recorder’s office and literally drives by the property just to make sure it is there.

In order to have the survey exceptions deleted off your policy, you need to get a “stake-in-the-ground” survey. A stake-in-the-ground survey is where the surveyor actually sends out people who “shoot your lines”. Today this is done with lasers, but it still requires someone to actually be on the property. And they literally put markers of some sort in the ground. When I did this in college we put wooden stakes in the ground with colored flags on them. I don’t know if they still do that or not.

In addition to having someone actually go on the property, the survey also has to satisfy certain title insurance requirements and be certified to the title company. This is sometimes referred to as an ALTA survey. ALTA sets these kinds of standards.

By obtaining an ALTA survey you can have the title company remove the survey exceptions from your title policy. In the next article I am going to talk about the other standard title insurance exceptions, so stay tuned.

YOURS, MINE, AND OURS: Divorce and Remarriage

Fred Vilbig - Wednesday, May 20, 2015

In the days of “Leave It to Beaver”, Ward and June married, had kids, raised them, and grew old together. I think that may be more the exception than the rule these days.

Today, I run into Ward and June less and less. Deaths and divorce make life difficult, and remarriages can make life complicated. It would be nice if everyone just got along, but I’m sad to say that that is the exception rather than the rule. The emotional and financial aspects of blended families can be very complicated. Divorced individuals and remarried couples need to give some careful thought to their situations for estate planning purposes.

Divorcees are often happy to hear that for inheritance purposes, their ex-spouse will be treated as having predeceased them. No further comment on that.

However, that is not the end of it. If the couple during their marriage had kids, on the death of the first ex-spouse to die, the kids will have to go to the surviving ex-spouse unless he or she has renounced his or her parental rights. But the remaining question is who gets the kids on the death of the second ex-spouse to die. I don’t think that you would want to leave that decision to chance or to a judge.

If you did estate planning during your marriage, you will want to check to see who will manage things on your death. In most relationships, one spouse is usually the one who calls the shots. He or she may have persuaded the other spouse who should be named as the personal representative of your estate or the trustee of the trust for your kids. However, after the divorce, you probably don’t want your ex-brother-in-law anywhere near your estate or your kids.

And then there is remarriage. Ideally there would be a prenuptial agreement, especially when there are kids by prior marriages. But let’s be real. Who wants to through the chilling waters of a pre-nup on a budding romance? It just doesn’t happen no matter what your advisors might tell you.

I had a 75 year old client whose husband died. She had a sizeable estate. Knowing her as I did, I told her that if she met someone, she needed to get a prenuptial agreement before tying the knot. She called me a month or so later to tell me that she had married a guy she had met at a trailer park. Some people just don’t listen.

But why a pre-nup, you might ask? I get calls from prior clients who are thinking about remarriage. They tell me that although they love their intended and want to take care of him or her, they also are concerned about how to protect their kids’ inheritance. They don’t necessarily want their hard-earned money to go to their intended’s kids. That might change over time, but that is generally not the case in the beginning.

If a pre-nup is off the table, then a client can create a trust before marriage for his or her pre-marriage assets. All of the planning can be included in that document. So long as you don’t put post-marriage assets in the pre-marriage trust, the new spouse will only have such rights in those assets that you may give him or her. If you put post-marriage assets in that trust, then things can get complicated.

Upon divorce or remarriage, clients need to pay attention to their estate plans. Who gets the kids? Who handles wrapping things up? Who handles the money after you’re gone or even when you become disabled? And what happens to your estate if you remarry?

Careful planning with an attorney is important in order to avoid emotional and financial train wrecks. Don’t put it off.

Henry’s Legacy

Fred Vilbig - Tuesday, May 05, 2015

One of the things I enjoy about my job is learning about people’s lives. As my wife says, everyone has a story. The problem is that not everyone has someone to tell their stories to. Henry was one of those people.

Henry was born and raised on a farm in Florissant, Missouri. Although he was raised near two of the biggest rivers in America, he never learned to swim. When World War II broke out, he was drafted early on, into the Navy, of course. Sink or swim! And he swam.

Henry was assigned to the admiral’s battleship in the Pacific. He had a good voice, so he became the radio operator. The radio room was near the bottom of the ship. Even during the roughest storms, he just rocked gently back and forth.

The captain heard his voice and decided he needed to be on the bridge piping orders to the crew. When an officer told him to report to the bridge, Henry explained that he liked his job. Evidently that isn’t relevant in the Navy.

The first thing Henry noticed on the bridge was that his chair had a seat-belt. When he asked what that was for, the officer said with an evil grin, “Oh, you’ll find out.” Henry found out. In bad storms that gentle rocking in the radio room became the worst roller coaster ride you could imagine on the bridge. That seat-belt came in very handy.

On a Navy ship, the bridge gives you a view of a lot of what happens on the deck. Henry watched incredible scenes of bravery from the sailors during battles. He saw men coming onto the ship from transports fall from their rope ladders and get eaten by sharks. And he saw the cursing kamikaze pilots after their wing controls had been shot out as they flew past the ship only to crash into the ocean. He was usually the last person any of them ever saw. Henry had incredible stories to tell.

But Henry didn’t have any children to tell the stories two. When he got back to the states after the war, he married, but he and his wife couldn’t have children. So he ended up telling the stories to me.

But more than that, Henry left a legacy in another way. As they were nearing the end of their lives, he and his wife decided to give their estate to a university to set up an endowed scholarship. I had the privilege to help them plan their estate and worked with the successor trustee to fund the scholarship on the death of the second of them to die.

As my wife says, everyone has a story. The problem is that upon our deaths, our stories can go silent. One way to continue the story is through an endowment to a charity. It’s just something to think about.

Long Distance Family

Fred Vilbig - Sunday, April 26, 2015

I got a call from a woman. She lived out-of-state and had found me on the internet. She had just heard that her father had died. He had lived in St. Louis. He had told her recently that he was going to name her as his personal representative in his estate. She thought he owned a house and had some bank accounts. She hired us to probate his will.

Once we got hired, we started doing some investigating. We found nothing, literally. We called the banks our client had told us about, and they told us that there were not any accounts that needed to be probated. We then checked the real estate records and found that his house had gone to some woman we had not heard about. When we asked the client who she was, she told us it was her father’s “caregiver” at the time of his death. I started to smell a rat.

It turns out that the dad had an extended family. He had been married several times and had had children by several women, some of whom he had not married. He had grown distant from most of the kids, but he had at least stayed in touch with our client, mainly through her efforts.

When the father grew older, he had become bed-ridden. With his kids and his ex-wives out of the picture, he had turned to caregivers. Since he didn’t have much money, we assume that he offered to pay them from his estate. We found a series of beneficiary deeds naming a succession of people to get his house on his death. We assumed that these were the people he had hired as caregivers over time. The house ended up going to the last in this series. We assume that she got the bank accounts too. We know that she got the life insurance that was supposed to pay for his funeral. It was only after a fight that she agreed to use it to pay for the cheapest funeral possible.

The sad thing about this story is how the father ended up dying. He was admitted to a hospital for infections he had contracted from bed sores he got from laying in his bed for days without being moved. An untreated infection is a very painful way to die.

My client wanted to go after this “caregiver.” The problem was that this would be an expensive and uncertain case. We don’t know what kind of an agreement she had made with the father or if he had just given her his assets as a gift. I told the client that without more information (which no one seemed to have), there would at best be a 50/50 chance of success.

In the end, the caregiver made off with the estate of a man who died a painful death from lack of care. It’s sad and ironic at the same time. Keep up with your parents. It’s the right thing to do.

Giving Your Cake and Eating It Too

Fred Vilbig - Saturday, April 25, 2015

I was approached by a client several years ago about a piece of real estate he owned out in the country. A neighbor of his had approached him about selling it, but he had a problem. The land had been gifted down to him through the several generations of his family. As a result of this, if he sold the land, he would have had a big capital gains tax. The property wasn’t generating any income, so he liked the idea of selling it, but he didn’t want to lose a fourth of it in taxes.

I asked him if he had any charities he favored. He said that he did, and he had remembered one of them in his trust. That was perfect.

I talked to him about a lifetime charitable remainder trust. So long as he didn’t already have a binding contract to sell the land, he could transfer the property to a trust and get a tax deduction (he could even be his own trustee), sell the property out of the trust without incurring any immediate capital gains taxes, invest 100% of the sales proceeds, and earn a “unitrust amount” (a percentage of the trust principal’s fair market value) for the rest of his life and the life of his wife. On death, the remainder would pass to his charity.

He thought about it for a little while and asked a bunch of questions. In a way, it sounded too good to be true. In the end though, he created the trust, sold the property, and started receiving income he hadn’t been expecting. In this day and age, a little extra income can go a long way.

He also became a hero at his church. They were going to receive a substantial gift at some point in the future, and they were grateful.

The client got to give away his cake and have it too. This was a win, win, lose result. The client won; the church won; and the IRS lost which is always a good thing.

Qualifying Longevity Annuity Contracts

Fred Vilbig - Wednesday, March 18, 2015

It is common knowledge that through advances in medicine and (in some cases) better living habits, we are all living longer than in prior generations. For a person who made it to 65 in 1900, they could reasonably hope to live to 77. For a person who makes it to 65 now, they can reasonably hope to live to 83. And more people are making it to 65 now than ever before. That’s the good news.

The bad news is that we are not really prepared. One-third of Americans reaching 65 have no retirement savings. They were led to believe that Social Security would take care of them. The other two-thirds have saved something, but according to studies, not nearly enough.

Many baby boomers had dreamed of early retirement, but after the Great Recession, that is now a pipe dream. Instead, people are working later and later in life. For many, this is a real burden, but they have no real option.

For those lucky enough to have some retirement savings, one concern is whether the money will last long enough. You have to start taking your required minimum distributions (“RMDs”) at 70 and 1/2, but you may still have some other sources of income you can use. For instance, you may still be in reasonably good health and can work a few more years. Maybe it would make sense to defer some of your retirement income? But how?

Last year, the IRS addressed this issue by modifying the Regulations that apply to RMDs. They did this by allowing what are called Qualified (or qualifying) Longevity Annuity Contracts (“QLACs”). If you reach 70 and 1/2 in reasonably good health and don’t need your full RMD’s right away, you can defer (but not beyond age 85) up to 25% of your retirement account (not to exceed $125,000). Depending on your situation, this may or may not make sense. You’ll need to talk to your financial advisor about that.

QLACs may not be for everyone. However, they are one more weapon in our arsenal for retirement planning. Talk to your financial advisor about whether this would make sense for you. If you don’t already have one, give me a call, and I can give you some recommendations. I just thought this would be good for you to know.

IRA Beneficiary Designations

Fred Vilbig - Saturday, March 14, 2015

When you open an IRA, your financial advisor will ask you who you want to name as your beneficiary. Typically for a married couple it will be the employee’s spouse. If the employee were to die before the complete distribution of the IRA, then the surviving souse can roll the IRA over into his or her own name. In a way this creates a new IRA, and distributions will be based on the surviving spouse’s life.

If the emplyee or surviving spouse were to die without naming a beneficiary, then the IRA will typically be distributable to a probate estate. This results in probate fees. In addition, it accelerates the taxes that haven’t been paid on the remaining balance in the IRA. The entire balance will have to be taxed within five years. Your heirs would lose the tax deferral.

So the question then is who to name as the contingent beneficiary or beneficiaries?

What I have seen from people more often than not is that after their spouse, they name their children. On the death of the IRA recipient, the IRA gets divided among the children. They each get what is called an inherited IRA, and it will be paid out over their own life expectancies beginning immediately. Distributions are not delayed until they reach 70 1/2. If they die in the meantime, they can name a beneficiary, but the distributions are locked in place and cannot be changed.

One problem with an inherited IRA is that they can be attached in bankruptcy. That is a pretty recent decision from the US Supreme Court. If they can be attached in bankruptcy, then I wonder how long before a judge decides they can be attached in any lawsuit.

Another problem with an inherited IRA is that a young beneficiary (whether a child or a grandchild) would be able to withdraw all of the IRA principal at any time. When they do that, they will lose the tax deferral benefit. In addition, large sums in young hands often lead to ruin.

In order to protect against the poor judgement of youth and lawsuits and bankruptcies, I tell clients to have their IRAs flow through a trust. By putting a trustee between the beneficiary and the IRA principal, it makes it hard for a young person to get their hands on the money for something they really don’t need or that might even hurt them. In the case of litigation, although a judge can order the beneficiary to pay a judgement, the trustee is not a party to the lawsuit and has duties to multiple beneficiaries. Judges typically respect this distinction.

So after setting up a trust, I tell clients that they need to name their spouse as the initial benefidiary on their IRA to allow for the maximum flexibility and tax planning, but to name their trust as the contingent. That is the best of both worlds to me.

Powers of Attorney Revisited

Fred Vilbig - Tuesday, February 03, 2015

I recently met with a couple who came in to update their estate planning documents. They asked me to review their current documents that had been prepared by another attorney almost ten years earlier. What I found kind of surprised me.

In looking at their powers of attorney, the maker of the power had appointed his or her spouse as her or his attorney-in-fact. On the death or disability of the other spouse, the eldest daughter would become the attorney-in-fact. On the death of the eldest daughter, the youngest daughter would become the attorney-in-fact.

The problem was that these powers of attorney were immediate, and not springing powers. In an earlier newsletter I linked to an article that talked about the difference between these two types of power of attorney. As that article pointed out, a springing power of attorney is not effective until a doctor certifies that you (the maker of the power) are incompetent. You retain complete control of your affairs until you really can’t handle things. With an immediate power of attorney, you immediately give the designated person the listed powers.

The powers of attorney that my clients had were not a problem as they sat across from me in our meeting. I had two competent, loving spouses facing me. The problem that I foresaw was what would happen when one of them became incompetent. When one of them became incompetent, then the powers he or she had over the competent spouse’s property would then immediately pass to the oldest daughter. So what happened on the incompetency of one of the clients was the eldest daughter would gain control of the assets of the competent spouse. It was a strange result. When I pointed this out to my clients, there were more than a little disturbed which was understandable. It was not what they had been led to believe they were doing when they signed the documents several years earlier. Fortunately, we still had time to fix things.

This is not the first time that I have had clients come to me to review the work of other attorneys. Every once in a while I come across things like this where the documents don’t do what the client wants. Fixing them when the clients are alive and competent is costly but doable. Once a person is incompetent or dead, it becomes much more difficult. The regular review of documents is important.

Letters of Intent

Fred Vilbig - Monday, February 02, 2015

When buying a business, you want to try to minimize your costs throughout the process. In the best of all possible worlds, you would prefer to just write a simple contract from the get-go and not have to go through the song and dance of negotiating.

That’s not realistic. The initial contract can be expensive to put together, go through several variations, and ultimately be rejected.

The alternative a lot of clients use is the letter of intent. With a letter of intent, you hit the high points to make sure you know the deal before you go to the expense of investigations and writing a contract. Letters of intent can vary significantly, depending on the deal, but several things should be covered:

1. Identify the assets you are buying with adequate specificity.

2. State what you are willing to pay, and how. If you are going to need to get financing, you need to state that.

3. Require the Seller to continue business as usual.

4. If the Seller will stay on as an employee or consultant, briefly state the terms of the agreement of continued employment.

5. Some letters of intent include warranties and representations and conditions to close, but that is typically with larger deals. However, even in smaller deals, it may be worth giving some thought to these issues.

6. Agree to work towards a definitive agreement.

7. Agree on generally when closing is to occur.

8. Have the Seller agree that while you are doing your investigation, the Seller can’t negotiate with anyone else.

9. Agree that any information obtained during the investigations and negotiations will be maintained in strict confidence.

10. State whether any brokers are involved, and if so, who, what’s their fee, and who’s paying.

11. Generally, a letter of intent is nonbinding, but typically certain provisions are. You need to state what provisions are binding. In the above list, typically numbers 3, 9, and 10 would be binding.

Once the parties agree to the contents of a letter of intent, you can start moving toward your investigations, preparing the definitive agreement, and ultimately the closing. The tricky part with a letter of intent, is making sure that you state the critical deal points and make them binding if that would be appropriate. And these deal points can vary significantly.

Starting off with a letter of intent can help you find out if the Seller is serious and if the deal points are realistic. If neither of these are true, then you need to walk on by and look for the next opportunity. No need for you to waste your time or money.