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Credits Against Federal Estate Tax

admin — Sun, 24 May 2009 09:10:54 +0000

Credits against federal estate taxes are allowed for the following:
a. Credit for estate taxes paid to the state. There is a maximum limit for the amount of this credit.
b. Credit for federal gift tax paid on gifts regarded by Internal Revenue Service to be a part of the estate for estate tax purposes.
c. Credit for taxes paid on transfers of property received from previous estates.
d. Credit for foreign death taxes paid.
e. Federal Estate Tax and Gift Tax Credit.
• Federal Estate and Gift Tax Credit. The following credits are effective against estate taxes for decedents and for gifts made after 2006. The credit is applied against either the gift tax or estate tax, not as a deduction against the taxable value of the estate. Note that the credit was increased over time. In 2007, a decedent with an estate of less than $2,000,000 will not have to pay estate taxes.
• Credit for State Death Taxes. After December 31, 2004, the state death tax credit has been replaced by a deduction for state estate taxes.
• Installment Payment of Estate Taxes. If the closely-held business interest exceeds 35% (formerly 65%) of the adjusted gross estate, the taxes attributable to that interest may be deferred up to 14 years; annual interest payments may be paid for the first four years and the balance may be paid in up to 10 annual installments of principal and interest. The annual interest rate is 2% on the first $1,000,000 of taxable value. There will be a cost of living adjustment on the portion of estate’s taxable value that qualifies.

Determining Estate Taxes for Spouses

admin — Mon, 18 May 2009 09:10:15 +0000

Estimating the tax liabilities under different alternatives is a part of good estate planning. The tax estimates and other transfer costs should include the costs for both the husband and wife. Well thought-out plans will explore the potential tax burden resulting from the unexpected death of either husband or wife.

Chain of title

admin — Sun, 22 Feb 2009 14:07:45 +0000

True ownership is primarily supported by a good chain of title. The chain of title provides a list of all conveyances and other documents recorded against the property. The chain of title should indicate that all of the conveyances between buyers and sellers are legitimate and unbroken. For example, Fred sold to Gene, Gene sold to Harriet, Harriet sold to Indira, and Indira sold to Jesse.

The chain should be uninterrupted. For example, the chain of title should not indicate that Quentin sold to Roy, and then Ursula sold to Vivian. How did the title get from Roy to Ursula?

In addition to recording conveyances, however, the title records will also record liens, easements, leases and other documents. The title examiner must be able to see through that clutter and clearly identify the rightful chain of title. However, the title examiner must also examine those other recorded documents to be sure that they no longer present a cloud on the title. For example, previously paid mortgage and other liens from the past should have a matching release of lien, indicating that they have been satisfied and no longer pose an encumbrance.

Ground lease

admin — Sun, 22 Feb 2009 14:03:37 +0000

Also called a land lease, the ground lease is one in which a tenant simply rents land, often without improvements of buildings. This is typically a net lease, with the tenant responsible for taxes, insurance and maintenance.

With ground leases, the tenant will then develop the property and build on the land. Because the tenant will need to recoup the high cost of development, most ground leases are long-term. Typical ground leases begin with at least a 40-year term, and sometimes provides for extensions.

This can be an advantageous arrangement for developers and tenants, as they avoid the cost of having to purchase the land. This is particularly true in areas with high land costs, such as downtown urban centers. Leasing also has certain tax advantages compared to purchasing.

Variable lease

admin — Sun, 22 Feb 2009 14:01:20 +0000

Most long-term leases have some sort of variable lease arrangement that allows the property owner to raise the rental payment charges. The basic methods for such adjustable leases are the graduated and the index leases, which are similar to their mortgage counterparts.

The index version of the variable lease makes periodic adjustment to the rental rate based on a predetermined index. The most commonly used index is the consumer price index (CPI), issued by the Federal government. However, other indices may also be used, such average rents reported by industry groups, trade journals, governmental bureaus or business media.

For example, to guarantee that they are not being overcharged for their penthouse office space, the Chicago accounting firm of Dewey, Cheatham and Associates negotiate an index leases that ties their base rent to the average base rent paid in the downtown area, as reported each year by Crain’s Chicago Business.

Because index leases can become complicated and expose landlords to disputes about calculations, some landlords opt for the graduated lease format. The basic graduated lease normally sets up a stepladder arrangement, in which the base rent increases at predetermined anniversary dates. For example, an industrial lease may charge a base rent of $4 per square foot, with annual increases of 7.5% beginning on the third anniversary of the lease signing.

The graduated lease may also be arranged on a seasonal schedule. For example, a storeowner on the tourist destination of Mackinac Island negotiates a lease, which arranges the rental payments so that they coincide with the tourist season. So, winter rents are dropped to $100, while summer rents may be adjusted to $1,200 per month.

Percentage lease

admin — Sun, 22 Feb 2009 13:58:07 +0000

A lease arrangement used by many larger shopping centers is the percentage lease. This arrangement ties the rental payments to the success of the tenant’s business, and is often used with properties in which the property itself (and its location) promises to bring customers to the tenant. A portion of the tenant’s rental payment is based on the tenant’s gross income.

With shopping malls and centers, for example, where the success of the tenants relies heavily on the marketing draw of the shopping mall, this gives both the landlord and tenant equal impetus to successfully market the entire mall.

The percentage lease is normally structured as either a gross or net lease, and occasionally with a variable lease feature. However, the entire rent payment is not based on a percentage of the tenant’s gross income. A useful example would be a triple-net arrangement, with a base rent of $5 per square foot plus 1.75% of the tenant’s gross income.

Obviously, the lease agreement will require the tenant to open the business’ books and accounts to the landlord’s scrutiny. Certified copies of the tenant’s business tax returns, audited financial reports and, sometimes, personal tax returns are normal disclosure requirements. Property owners who use the percentage lease are usually astute enough to know what market averages are for the local area and the tenant’s industry.

To protect the landlord’s bottom line, percentages leases typically give the landlord a recapture clause, which allows the property owner to reclaim the rental property if minimum sales projections—as pre-stated in the lease agreement—are not satisfied.

Net lease

admin — Sun, 22 Feb 2009 13:54:28 +0000

Also called a net-net (NN or double-net) or net-net-net (NNN or triple-net) lease, the net lease is most commonly used for commercial and industrial properties. The key element with the net lease is that in addition to paying a base rent, the tenant must also pay a portion of the building’s operating expenses, which may include maintenance, taxes and insurance.

With multi-tenant facilities, the maintenance expenses are typically called “CAM,” or common area maintenance expenses. For a small strip mall, for example, CAM may cover parking repaving, repair, cleaning, snow plowing and upkeep, as well as building washing and cleaning. For an office building, CAM may also include heating and cooling costs for the lobby and hallways, common area janitorial service, building security systems and landscaping.

The number of operating expenses (maintenance, taxes and/or insurance) that the tenant must pay in addition to the base rent determines the lease name.

Net lease. The net lease charges one of the above operating expenses, usually CAM or taxes.
Double-net lease. The NN or net-net lease charges two of the above operating expenses, usually the CAM and either the taxes or insurance.
Triple-net lease. The best lease for the landlord is the riple-net, which passes on a prorated portion of all of the property’s operating expenses to the tenant.

For example, Acme Personal Services leases office space in a multi-tenant building. The 2,000 square feet of office space it rents is 15% of the total leasable space in the building, which is now completely occupied. Acme’s “triple-net” lease charges them $6 per square foot per year, plus 15% of the CAM, property taxes and insurance (charged quarterly). So, Acme’s base rent is $12,000 per year (or $1,000 per month); and every quarter, it receives an additional bill for its portion of the CAM, real estate tax and insurance