George Santayana is credited with the saying that those who forget the past may be condemned to repeat it.  We live in a world where federal tax benefits seem to be viewed as fixtures to which we have entitlement, but many of these benefits are subject to sunset provisions.

This is the case with “short sales” of real estate.  A short sale is a sale of real estate for a price that is less than the current mortgage indebtedness.  In not so olden times a house that had more debt than value couldn’t be sold except at foreclosure.  But because foreclosure proceedings are so slow, lenders began to adopt a policy of taking a deed in lieu of foreclosure and permitting the borrower to escape payment of the deficiency.  This allowed the lender to take the title to the property and quickly sell it in a private setting rather than see the house knocked down to the highest bidder the sheriff could find in a once a month auction.

Until 2007, one did not escape so easily.  If you turned your house over to the bank for $300,000 when the mortgage debt was $450,000 and the bank did not take a judgment for the deficiency, the discharge of the indebtedness was considered income to the borrower.  It meant that if he went the short sale route on the numbers just referenced, he had $150,000 of phantom income and that income was subject to tax at ordinary rates.

In 2007 the government passed the Mortgage Forgiveness Debt Relief Act.  It eliminated this tax on unpaid income but only through December 31, 2012.  The tax bill passed in January, 2013 revived the law but only through the end of 2013.

Could the law be extended again?  Yes.  Will it?  Perhaps.  But that’s no guaranty.  If you are to have any hope of effecting a short sale before December 31, 2013, now is the time to start down that road at double step.  You typically need an appraisal of your home from which the borrower can judge the extent of its probable loss.  In the end, you need all secure mortgage holders to agree to permit you to sell the property for less than the mortgage debt outstanding.  The first step is typically to contact a realtor and ask who manages their portfolio of properties that will be made available for short sale.

Jenice Armstrong of the Philadelphia Daily News wrote a column about Beth and Daniel Shak’s divorce. The Shaks divorce was finalized in 2009, but recently Mr. Shak filed a petition to enforce the parties’ settlement agreement and is seeking 65% of Mrs. Shak’s extensive (and expensive) shoe collection. Mr. Shak contends that this collection is an asset that was not disclosed as part of the parties’ property settlement agreement and that Mrs. Shak did not provide a “full and fair” disclosure of this collection nor did she list it in an inventory of her assets.

Continue Reading Expensive Shoe Collection Brings Divorced Couple Back to Court

It was announced on May 24, 2011 that new home sales rose for the second month in a row; a fact that startled many economists. Have we reached the bottom?  No one can be certain but a device from the estate planners portfolio is getting renewed interest and it is one that Domestic Relations lawyers like because it would appear to insulate family members from “increase in value” claims by spouses who are not part of the family.

The devise is called a Qualified Personal Residence Trust.  The purpose from the estate planners viewpoint is to get appreciating residential property out of a person’s estate. Here is how it works.


Mr. and Mrs. Warbucks buy a house in Longport NJ in 1970 for $35,000. To quote Billy Joel, they live in Allentown but spend their weekends at the Jersey shore.  Mr. and Mrs. Warbucks are now in their 70s and still enjoy the property but it is mostly a grandchild magnet today.  At the height of the market in 2007, the property was worth $3,000,000 and thus had a $2,930,000 capital gain.  The Warbucks children would like to keep the property after their parents die and pass it along to other family members. 


The game with a QPRT is this.  Today, the Longport property would appraise for $2,200,000.  If the Warbucks deed the property into a QPRT, they do so at today’s appraised value and they report that as a gift depending on how long they want the trust to last.  The key is deciding how long the trust should last because if you guess wrong and the grantors die before the trust term expires, the magic of the tax scheme turns into a pumpkin.  But if they are still living when the trust does terminate (typically 5-10 years) any increase in the value of the property is not part of the Warbucks’ taxable estate for federal purposes.  At the end of the trust, the property goes to the trust beneficiaries as owners in fee (i.e., complete owners) subject to the right of the grantors to remain in residence for their lives.  In a world where prices are rising, this is a very efficient tax device.


This has a useful divorce device as well.  Many folks with property like the Warbucks tried to do the same thing by turning the house into a partnership and conveying increasing interests to the next generation each year.  This also is tax efficient.  Once an interest is conveyed to the child, the increase in the value of the interest belongs not to the older generation but the new partners.  But, as we saw in a case a couple of years ago, when the second generation couple split up, the daughter in law of the Warbucks laid claim to an increase in value on the partnership interest.  It cost more than $100,000 to buy out the “increase in value” of the partnership interest when the divorce settlement was reached. Did Mr. and Mrs. Warbucks want to give their no good ex daughter in law $100,000 so that their son could settle his divorce case?  Of course not.  But the claim was made and the claim was real.


With the QPRT a similar result was achieved but because the son of Mr. and Ms. Warbucks never had a “possessory” interest in the trust assets, it is our impression that any increase in value up to the time the trust terminates would be excluded as property subject to equitable distribution. That probably changes when the interest becomes possessory and there is an interesting question as to whether the property is in possession but subject to a life estate by the grantors.  The leading case on “increase in value” of trusts is Solomon v. Solomon, 611 A.2d 686 (Pa. Supreme 1992).


In any event, if your family is in the range of paying federal estate taxes and you have folks with very highly appreciated property, the QPRT is a device worth speaking to an estate planning attorney about.  Because if prices do begin to rise again, this device has a means of seeing the fruit grow in the estate of a new generation.

The October 15, 2010 edition of USA Today informs us the business of living together without benefit of marriage in what is termed a “committed relationship” is becoming more and more accepted. What was a generation ago deemed “living in sin” is viewed as a bad thing by only 38% of Americans.  And perhaps, more importantly more than half of Americans who marry have lived together before they married.  The US Census Bureau tells us that more than 16,000,0000 of us are living together as couples and more than 90% of those couples are of the opposite sex.

The law of living together in Pennsylvania makes no distinction based on sexual orientation.  The law is essentially no law but what the parties make by way of contract. Married folks have a Divorce Law; they have protections related to health insurance and estates law because of how Pennsylvania statutes are written.  But they do not include couples who choose to live together without benefit of marriage.


Unfortunately, many couples tend to ignore this gap in the law. Typically they form contracts in which they have what is called joint and several liability without thinking about it.  Joint and several liability means that where two people sign a contract with a landlord, a home seller, a mortgage company or an auto lender, they are agreeing that the party in power (the seller, car dealer, landlord etc) can pick and choose who they pursue for their legal remedies.


What does this mean in practical terms?  Your boyfriend has bad credit.  If you buy the car he wants, it will be $80 a month cheaper if you finance it than if he does.  He’s a good guy.  So you buy the car; or perhaps you “just” co-sign the note.  Next thing you know, he finds another love or loses his job, or both.  Suddenly, GMAC is calling you.  You explain that it’s his car, he’s a low life and your credit has always been perfect.  Well, not any more.  You agreed to cover his debt and GMAC really is not in the relationship game.  They want money and they have little concern for who’s driving.  If the car is titled in your name, you could probably re-possess the vehicle but the guys and girls who repo cars don’t often show up in the yellow pages.


It gets worse with houses.  It has become very common for couples to buy their first home before they tie the knot. Once the marriage does take place they could re-title the property into a tenancy by the entireties.  This would protect them from some creditors and would establish a mechanism (the Divorce Code) to divide the property equitably if the marriage does not work out.  But rarely do couples realize the legal difference. Divorce Courts have jurisdiction over property acquired during  the marriage.  That does not include property acquired before the marriage.  That property is partitioned.  Under partition law, you are presumed to have gifted the money each of you put into the enterprise.  If the property has to be sold, the sales costs are subtracted, the liens cleared and each co-owner gets half of what is left.  So if you put down $80,000 of the $100,000 down payment and paid all of the mortgage for the next five years, your spouse will get a windfall that a Divorce Court might otherwise correct.


So how does one protect from these problems?  First, don’t get involved in any joint debt unless you are married and as little as possible even after you are married. Married or not, it’s no fun being responsible for debt your friend or spouse ran up while having a good time at your expense with someone called “not you”. Second, if you must make that home purchase before marriage or if you are going to form a business or loan money to your amour get the deal in writing.  Yes, it is possible to make these agreements orally but judges are going to look at you as if you are crazy when you come to court claiming that you and your girlfriend orally agreed to form a business together.  For young people, engaging lawyers to spell out these kinds of agreements seems like an unnecessary expense.  But, if you asked anyone who has been caught with a bad relationship and no written understanding, that person will tell you that this kind of legal engagement is money well spent.

All married couples should have an estate plan. For those with special needs or large estates estate planning often involves the creation of trusts.  Trusts are a device by which the owner of property conveys it to others to hold for a defined purpose. It is often a means of avoiding estate tax, personal property tax or even creditors who might otherwise claim an interest.  Trusts have been around for centuries, most often used as a means for the grantor (the donor) of controlling property after his lifetime.

There are many forms of specialized trusts.  Some are used to allow the property to gain value without that value going into the taxable estate of the grantor.  A classic example of this is something dubbed QPRT or Qualified Personal Residence Trust. You own a piece of real estate.  You anticipate that it is going to appreciate substantially in the future. Your taxable estate is already at the point where the federal government is going to want a slice (beyond $2 million currently). The plan would be for your kids to inherit the real estate anyway. For this a QPRT may be an answer.  You convey the property to a trust set up to hold it.  You can continue to use the property and pay the expenses associated with it. After you have left in the trust for a period of time, typically ten years, the property goes to your kids (or other beneficiaries you name). Any appreciation that occurred during the ten years the property was in trust is not in your estate but is something your kids will have to deal with. So long as the property you conveyed was worth $1,000,000 or less at the time you established the trust, there is no federal estate tax associated with the gift to the trust. And in valuing the gift, the IRS discounts the value of the house because it was conveyed subject to your right to occupy it for a term of years. If you want to stay in the house after 10 years, you will have to pay a fair rental value to your kids in their capacity as new owners

As with all good tax strategies, there are quirks. Don’t die before the property gets transferred to the kids because the property will still be considered part of your estate, including the appreciated value. Stay friendly with your kids because once the trust term has expired and they get title, they don’t have to rent it to you or let you use it.  It’s theirs.

So having described this cute but otherwise legal tax scheme, why do we discuss it in the context of divorce. Because the transaction is a nightmare.  At one point (pre trust) there was a $1 million asset to divide.  Now, there is a completed gift subject to a right to occupy for a fixed term of years.  The only asset left is the value of the 10 year lease and that can be tough to calculate especially if the property is in a volatile resort market.

In a similar vein, we are working with a situation where our client decided that he would be generous to his second wife and her kids from her first marriage by putting a vacation home in trust for her benefit. The trust was to give her income for life and provided that the property could be disposed of to meet her financial needs. Once she died, whatever was left from the property was designated as a gift for wife’s children.

The house tripled in value in the past 15 years. But while the estate plan was well mapped out it did not include a divorce contingency. The parties are separated and wife has chosen to occupy the house and sue the husband for support. When husband suggested that the $1,500,000 in equity could help to support her and pointed to the trust instrument’s income provisions, wife responded that she has only a life estate and that is all that could be valued as “hers” for purposes of equitable distribution.  Now the trustee (wife’s son from the prior marriage) has mortgaged the vacation house to acquire another $500,000 residence for his mother but the claim is still made that she has almost no interest in the home and that her husband (who created the trust for her support) must supplement her needs including the cost of the house that he put in trust to support her. The estate planning aspect of this transaction was masterful.  That is, until the divorce intervened. 

So the message is that if you are doing estate planning ask your attorney about the “divorce” contingency. And if you are in a divorce, make certain that your counsel understands trust property as well as marital property.