Demanding Transparency from your Broker

By Gary Torrell

When traversing the complicated transition into home ownership, buyers often view their real estate broker as a trustworthy, impartial advocate. While brokers offer helpful advice throughout the process, it’s important to recognize the economics of the situation: brokers are only paid when they make a sale, and thus are biased towards closing the deal. And when one broker represents both buyer and seller, a buyer may need to take extra steps to ensure transparency.

A recent court decision over the sale of home in Malibu dealt with the broker’s liability in reporting the size. A salesperson for a brokerage firm listed a home with “approximately 15,000 square feet of living areas.” A couple made an offer to purchase the property. While the deal was in escrow, the buyers hired an inspector to measure the size, and found the property was smaller than listed. After they pulled out of the deal, the property was re-listed as before while omitting the details about the smaller measurements. A second buyer, relying on the measurements in the listing, sued the broker, after entering into escrow and finding the property measurements to be inaccurate.

In the suit, the second buyer contended the broker owed him a fiduciary duty. The court found in favor of the buyer, since the broker chose not to inform buyer of the more recent size.

In the that case, the second buyer entered the deal based on the listed square footage declared by the broker, only bringing in their own home inspector once they suspected something was amiss. It’s important to recognize that when listing a home, brokers will often rely upon — and recommend — their own trusted home inspectors. To level the playing field, buyers should retain their own reputable, licensed building contractor with at least ten years’ experience as a general contractor to do the inspection.

Most home sales in California are based on standard contracts drawn up by the broker group, designed to protect the broker from liability and ensure they receive their commission. Whether buying or selling, the broker’s contract is their “home court advantage.” Hiring your own lawyer to review the contract before signing can help you understand the agreement and potentially save a big headache later on.

Buying a home can easily be the largest transaction of your lifetime, so it’s important to go in knowing your rights, and how to ensure a fair deal. For more advice on protecting your interests in the real estate process, read up on how to avoid eight common mistakes when buying and selling your house. 

Avoid Estate Planning Worry: Start Educating Your Children Early

By Bruce Sires

A few weeks ago, I was consulted for a CBS News article about preparing children to handle the financial windfall of a large inheritance. In the article, which you can read here, I suggested parents start educating their children early with hands-on exercises in saving, investing and giving back.  I’d like to expand on that advice.

Depending on a child’s financial education, they may see a large sum of money as something to be spent, and not as a foundation for a secure future. In many cases, these children grow up being spoon fed by their parent’s wealth, without respecting the financial habits that created that wealth in the first place. But with a bit of planning, parents can ensure their children learn about the time value of money, compounding interest, diversifying investments, and helping others through charitable giving.

Starting from a young age, give your children an allowance and discuss with them how they’re going to spend it. Maybe give them some "ideas” like saving part of it or giving part of it to a charity that's important to them. In the beginning its only conversation and will blossom later.

If you start early and they see the value of saving, when they get to middle school they can start investing. Have them "buy" ten shares of stock in few businesses that are interesting to them, then have them follow the companies for a few months. Talk to them regularly about the ups and downs, which are a natural part of investing, and teaching them this way shows them first hand that bad investments can be a valuable learning experience. Losing is just as much a part of the process as winning, and these are lessons best learned at a young age with small sums, rather than later on when the stakes are higher. Meanwhile, the savings account can continue, or some can move into fixed income securities. As they reach their later teen years, start involving more money as they start to learn the game.

Another track is to give them a certain amount to allocate to charities of their choosing. Just like buying stocks, put the choice in their hands. Encourage them to decide which issues are meaningful to them, and then have them research organizations that are making a difference in that field. Hopefully over time they will see the value of sharing their wealth to give an advantage to those less fortunate.

These are just a few suggestions and are by no means the only way of preparing children to manage an inheritance. The important thing is starting early with a hands-on program, allowing them to make their own choices and learn from their mistakes, and discover firsthand the value of using wealth to enrich the world around them.

A Match Made in Bar Heaven

 Matching young lawyers with those in need of pro bono legal services

By Autumn Ronda

Pro bono work is a valuable experience for any young attorney. Specifically, a young attorney will find that he or she is creating the opportunity to gain practical lawyering skills, while making a positive impact in the community by helping those who cannot afford legal services. In an article I wrote for the Beverly Hills Bar Association, I discuss the reciprocal benefits of pairing young lawyers in need of real-world experience with those in need of pro bono legal services, and suggest ways in which young attorneys can find a volunteer program that is right for them. 

Read the full article here: http://www.bhbaweb.com/barristers/category/barbrief/

Recent Tax Developments May Affect You

By Michael R. Morris

The following tax developments may affect you, your family, your business, or your investments. If any of these tax developments apply to you, please call me or one of the other attorneys in our Tax and Wealth Planning Group for more information on how to take advantage of or minimize the impact of these developments.

Tax Court limits annual amount of IRA Rollovers

A law limits the number of IRA rollovers that can be made in any 1-year period to one. Recently, the Tax Court held that the limit applies not to each separate IRA an individual may own, but to all of his or her IRAs. It reached this result even though the IRS had indicated in proposed regulations and tax publications that the limit applies to each IRA. Thus, an individual with three IRAs could make three rollovers in a 1-year period under the IRS guidance but only one under the Tax Court decision. After considering the matter, the IRS has announced that it will adopt the more restrictive view of the Tax Court. However, the new rule won't apply to any rollover that involves a distribution occurring before 2015. The IRS emphasized that an IRA owner will continue to be able to transfer funds from one IRA trustee directly to another as frequently as desired. Such transfers are not rollovers and thus are not subject to the limit.

Popular tax breaks expire, under congressional revision

A number of popular tax breaks expired at the end of 2013. For individuals, these expired items include, among others, the deduction for state and local sales taxes, the deduction for qualified tuition and related expenses, tax-free distributions from IRAs for charitable purposes, the deduction for mortgage insurance premiums, the exclusion for discharged principal residence debt, and the provision allowing a higher exclusion for employer-provided transit benefits. Work has begun in Congress to revive these provisions and extend them through 2015. Some key business breaks might also be brought back, including the research credit, higher expensing, bonus depreciation, employer wage credit for activated military reservists, work opportunity tax credit, and 15-year straight line cost recovery for qualified leasehold, restaurant, and retail improvements, among other items.

Supreme Court holds severance payments subject to social security taxes

 In a unanimous decision (with one justice not participating), the Supreme Court, reversing the Sixth Circuit Court of Appeals, has held that severance payments that were made to involuntarily terminated employees, and that weren't tied to the receipt of State unemployment insurance, are subject to tax under the Federal Insurance Contributions Act (social security taxes). The Court concluded that the severance payments at issue fell within the law's broad definition of “wages” for social security tax purposes.

IRS releases inflation-adjusted luxury auto depreciation limits for 2014

 Under special “luxury automobile” rules, a taxpayer's otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2014.

Maximum auto/truck values for cents-per-mile valuation

The IRS has released the 2014 maximum fair market values for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate. An employer must treat an employee's personal use of an employer-provided auto as fringe benefit income and value it using one of several methods. One of the permitted methods allows an employer to value personal use at the mileage allowance rate (56¢ per mile for 2014). However, this method may be used only if the auto's fair market value does not exceed $12,800, as adjusted for inflation. The inflation-adjusted figures for vehicles first made available to employees for personal use in 2014 are $16,000 for autos (same as for 2013) and $17,300 for trucks and vans (up from $17,000 for 2013).

Relief from individual mandate for certain limited health coverage

The health care law contains an “individual mandate”—a requirement that most U.S. citizens and legal residents maintain minimum essential health insurance coverage (i.e., government-sponsored programs such as Medicare, Medicaid, Children's Health Insurance Program; eligible employer-sponsored plans; plans in the individual market; certain grandfathered group health plans; and other coverage as recognized by Health and Human Services) or be subject to a tax penalty for 2014 and later years. The IRS has provided relief from the penalty for months in 2014 in which individuals have, under Medicaid and chapter 55 of Title 10, U.S.C. (medical and dental care for members and certain former members of the uniformed services, and for their dependents), limited-benefit health coverage that is not minimum essential coverage.

IRS proposes regulations on the individual mandate to carry health insurance

The IRS has issued proposed regulations on the individual mandate to carry health insurance. The regulations include additions to the list of government-provided health plans that don't provide minimum essential coverage and a liberalization of the hardship exemption rules under which an individual who fails to carry coverage can escape the penalty.

FAQ provides guidance for employers on subject of individual mandate

The IRS has issued final regulations and guidance in the form of frequently asked questions (FAQs) on the health care law's so-called employer mandate imposed on a large employer (one that employed on average at least 50 full-time employees on business days during the preceding calendar year). The FAQs cover a variety of topics including how to determine whether an employer is subject to the mandate, how to properly identify full-time employees, and how to calculate the shared responsibility payment. The mandate or employer shared responsibility provisions, as they are called, essentially impose a penalty on such employers if one or more of their full-time employees obtains a premium tax credit through the insurance exchange. The mandate has been delayed until 2015 and its applicability to mid-sized employers (between 50 and 99 full-time employees) has been delayed until 2016 if the employer meets certain requirements. In addition, they provide a phased-in coverage requirement for large employers.

Small estates get more time to transfer unused exclusion to surviving spouse

The estate of a decedent who is survived by a spouse may make a portability election. This allows the surviving spouse to apply the decedent's unused exclusion amount to the surviving spouse's own transfers during life and at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount. In general, the election must be made within nine months of the decedent's death on the estate tax return, even if the estate is below the exclusion amount so that a return normally would not be required. Because many estates below the threshold did not file, the IRS provided a simplified method to obtain an extension of time to elect portability. Provided certain requirements are met, the IRS will grant an automatic extension to make the election on an estate tax return filed on or before Dec. 31, 2014. Taxpayers failing to qualify for this relief may request an extension of time to make the election by requesting a letter ruling.

IRS releases new guidance on virtual currency

 The IRS has provided guidance in the form of frequently asked questions (FAQs) on the tax treatment of virtual currency, such as Bitcoin. This guidance treats virtual currency as property for U.S. federal tax purposes. Thus, the general tax principles that apply to property transactions apply to transactions using virtual currency.

Michael R. Morris to Co-Chair 2014 CalCPA Entertainment Industry Conference

Valensi Rose partner, Michael R. Morris, will co-Chair the upcoming 2014 Entertainment Industry Conference presented by CalCPA.  The annual event, held this year on June 19, 2014 at the Hyatt Regency Century City, highlights recent changes in the entertainment industry and provides expert advice and guidance for CPAs and other industry professionals.

In addition to his co-Chair duties, Mr. Morris is also moderating the “Music Industry Update” panel.  The high-powered panel includes Richard Busch, Esq. (King & Ballow), Larry Blake (Concord Music Group, Inc.), D. A. Wallach (Spotify), and Steve Winogradsky, Esq. (Winogradsky/Sobel). Mr. Morris will lead a discussion on licensing vs. sales and digital music royalties.

For more information and to register for the event, click here.

Insurance Adjuster Liable for Misrepresentation

By Laurie Murphy

When a large tree fell onto the insureds' property and damaged their home, they did what any other homeowners would do - they called their insurance company.  The insurance company, Travelers, sent out an adjuster who took some photos and told the insureds that their policy did not pay for cleanup.  Though they asked for another adjuster, Travelers refused to appoint one.  Based upon the adjuster's representations to them, the insureds paid to clean up the mess themselves.  They then sued the adjuster for misrepresentation on the theory that they relied upon the adjuster in spending their own money to clean up the damage.  The insurer argued that an adjuster could never be sued individually for misrepresentation in the course and scope of his employment.  The trial court agreed, but the appellate court reversed finding that an adjuster who misrepresents the terms of an insureds' policy to their detriment can indeed sue the adjuster individually for misrepresentation.  

Can You Enforce The Arbitration Clause In A Trust Against A Beneficiary Who Is Challenging The Trust? A Recent California Court Of Appeal Case Says No.

By Lynda Chung

Lynda Chung

Over the years some arbitration clauses in different contracts have withstood the litigants’ challenges.  Some arbitration clauses have not.   In a recent California Court of Appeal cases, McArthur v. McArthur (2014) 2014 S.O.S. A137133, the trustee attempted to enforce the arbitration clause in the amended trust document (the “Amended Trust”) created by her mother against the beneficiary who was the trustee’s sister.  The Amended Trust required mediation, and if necessary, arbitration of “any claim or dispute arising from or related to the Trust as amended.”  The Court of Appeal held that the arbitration clause in the challenged the Amended Trust is not enforceable against the beneficiary who was not a party to the Amended Trust.

In McArthur, in 2001, the settlor (the mother of the plaintiff and the defendant) created a trust which purported to distribute her assets upon death to her three daughters equally.  In January, 2011, the mother amended the Trust, giving a greater portion of the trust property to Kristi, the respondent, and also naming Kristi the trustee of the Trust.  The mother died in August, 2011.  Thereafter, Pamela, another daughter, filed a petition to invalidate the Amendment on the grounds that her mother lacked capacity when she executed the Amendment and that Kristi committed financial elder abuse against their mother.  The trustee moved to compel arbitration of Pamela’s claims pursuant to the arbitration provision in the 2011 Trust, and Pamela objected to the motion on the grounds that she was not a party to the Amended Trust.  The trial court agreed with Pamela, and the trustee appealed.

Noting two inconsistent cases from Arizona (holding that the arbitration clause is unenforceable against the beneficiary who was not a party to the trust agreement) and Texas (holding that the arbitration clause was enforceable), the California Court of Appeal held that the arbitration clause in a trust instrument is not binding on a beneficiary who never agreed to it.  “It is illogical to suggest that Pamela’s claim of entitlement to benefits under ‘the trust’ as it existed before the 2011 amendment amounts to acceptance of an arbitration clause first appearing in the 2011 amendment, a document she specifically challenges as invalid.” (Emphasis in original.)

It should be noted that the holding of this case was obviously limited to the beneficiary who was not a party to the Trust and who challenged the very instrument containing an arbitration clause.  If the disputes were of a different nature, for example, a fee dispute between the beneficiaries and the trustee who accepted her fiduciary position upon review of the terms of the trust, the result would have been different because the trustee’s acceptance of the trusteeship implies her acceptance of the terms of the trust, including the arbitration clause.

Contact Lynda Chung