SLO: (805) 546-8785 | Paso Robles: (805) 226-4148

Posts on Jan 1970

New Businesses Beware of Fraudulent Companies

Straying a bit from taxes, and pulling from a recent experience, I am posting a general warning to all California businesses.

Multiple companies are sending out "Annual Minute Complaince Obligation" documents that look official, even providing a seal on the top that is very similar to California's seal. These people are frauds. There is no annual requirement to file corporate minutes with anyone; a company need just maintain an up to date corporate book. These companies are requesting anywhere from $150 – $300 for their services.

Recently, a client of ours received two of these documents. One was the Annual Minute compliance document above. The second was a document actually entitled "statement of information". This steps way over the line of misrepresentation as California's required filing, with a $25 fee, is also called the statement of information. There is no sanctity among frauds. It appears they will provide more insidious misrepresentations in an attempt trick honest business owners

Beware, the fine print expressly states that these documents are a private solicitation for services. Unfortunately, given their official appearance, many people have simply paid the amounts. Review each document carefully, and if you have any questions, please feel free to give us a call and we would be happy to review any document you receive.

Read More
SLO Attorney, SLO Lawyer, San Luis Obispo, Municipal Law

We’ve all seen real estate advertisements containing seemingly enticing statements such as “Property is under Williamson Act contract for low-low taxes!!” Unless you enjoy paying your hard-earned money to the government, the promises of low taxes sound encouraging. But what does having a Williamson Act contract on a property really mean?

Williamson Act contracts are a creature of the California Land Conservation Act of 1965 (Gov. Code §§ 51200 et seq.).  The Williamson Act was enacted to preserve agricultural lands and prime agricultural soils from “more profitable” commercial and residential development. Under the Williamson Act,  a property owner voluntarily enters into a land conservation (Williamson Act) contract with the County (the contract is generally approved so long as all land conservation conditions are met, such as meeting the minimum lot size which is dependant on soil quality). Once the County approves the contract, the contract is recorded in the official records. The Williamson Act contract then runs with the property and binds all future owners to its terms and conditions. Primarily, the contract restricts the subject property to agricultural-related uses only. As a result of these restrictions, property taxes are reduced. Williamson Act contracts are for a term of ten years and are self-renewing – after the tenth year the contract automatically renews for another ten year term unless the property owner terminates by filing either a notice of non-renewal or cancellation request with the County. The County may also file a notice of non-renewal for properties found in violation of their Williamson Act contract.

The County of San Luis Obispo has adopted detailed standards and guidelines that, among other things, set forth the “compatible” uses for properties under Williamson Act contracts. These standards and guidelines are now in the process of being revised. However, in general, the compatible uses are all agricultural-related with a preference for “food and fiber” production and the preservation of prime soils. Some examples of the compatible uses are crop production, grazing, ag-processing, and animal raising and keeping. Single family residences, farm worker housing, and ag-accessory structures are also allowed but are subject to certain restrictions and provisions that can be found in both the County’s Williamson Act Guidelines and in its land use ordinance. Uses such as commercial horse breeding and training have also been found to be compatible, though recreational and personal horse operations have not; in order for recreational horse operations to qualify, the property must have some other underlying agricultural use. It is absolutely critical to know exactly what uses are and are not allowed along with your intended use of the property before a Williamson Act property is purchased as these restrictions do not go away!!

The primary benefit of Williamson Act properties is usually their “low- taxes.” At times the tax benefit is marginal at best as the contract’s burdens outweigh its benefits. Although the potential benefits of having a property under a Williamson Act contract may sound appealing to a prospective purchaser at first, the restriction becomes an almost impossible hurdle to overcome if the owner later chooses to transfer a portion of the property that is less than the Williamson Act contract allows. Instead, in order to transfer the property, a property owner will need to either cancel the Williamson Act contract (10 year process) or transfer enough property to meet the minimum parcel requirements for all contracted land (which is sometimes impossible). Additionally, depending on a property’s location and zoning, its Williamson Act taxes may be almost identical to its unrestricted taxes. Before any Williamson Act property is purchased consult the County assessor to determine what the actual tax benefits are for the particular property.

Williamson Act contacts may add significant value to a property but due diligence must be exercised to ascertain exactly what that value truly is and how a Williamson Act contract affects a particular property. While Williamson Act contracts are somewhat standard each property is unique. Sometimes a Williamson Act contract can make an otherwise unaffordable property affordable and sometimes the contract does nothing but frustrate a property owner’s rights. Effort to determine such value and burden will certainly be rewarded in the end. We encourage all Williamson Act property owners and prospective purchasers of Williamson Act properties to talk to a lawyer about how their Williamson Act contract affects their property.

Please stay tuned for a discussion on recent State policy regarding commercial horse boarding and breeding operations and recreational operations, and how these operations fit into the Williamson Act. 

Read More
Employers Beware: Breaks and Lunches

We've been monitoring an important case affecting employer and employees, Brinker v. Superior Court, which has worked its way to the California Supreme Court.  The case addresses important issues related to employee breaks and lunches, including the timing of breaks and employer responsibility for ensuring that employees take breaks.  Brinker has generated significant interest among large employers and labor groups.  The case has been fully briefed before the Supreme Court and the parties will now wait for the court to schedule oral argument.  Although the court's decision has the potential to be somewhat wide-ranging, addressing specific statutory requirements regarding timing of breaks, we'd like to focus on one crucial issue:  whether an employer must ensure that its employees take rest breaks and meal breaks.

The plaintiffs in Brinker were restaurant employees attempting to bring a class action against a large restaurant chain, alleging violations of California law related to breaks.  On the issue of responsibility for taking breaks, plaintiffs argued that California Labor Code section 512 affirmatively requires employers to ensure that breaks are actually taken.  The Court of Appeal examined two federal court decisions on the issue decided under California law and concluded:  "We find the reasoning in Starbucks and Brown persuasive and conclude that employers need not ensure meal breaks are actually taken, but need only make them available."

So, the Court of Appeal reasonably concludes that employers don't have to babysit employees by requiring them to exercise a right that is provided them by law.  The problem, however, is that this holding from Brinker is not currently "good law" because the case has been accepted for review by the California Supreme Court.  Employers and employees will now have to wait for the Supreme Court to issue a decision addressing not only responsibility for breaks but the timing of them.  We trust the Supreme Court will read section 512 as the Court of Appeal did, as a requirement to make breaks available but not a mandate to grab employees by the collar and march them off to the break room.

While the Supreme Court considers the matter the best course of action is to take all reasonable steps to ensure that employees are taking breaks.  Do not allow employees to "work through" break or lunch periods.  These break periods are instrumental in creating and maintaining a safe and healthy work environment.  Furthermore,  violating break laws can lead to adverse consequences including money damages and penalties.  We'll keep you updated on the status of the Brinker case, including its effect on break timing.

Michael M. McMahon – mmcmahon@carnaclaw.com

Read More
Paso Courthouse Tour

The SLO County Bar Association presented a tour of the Paso Robles Courthouse on July 13.  The tour was an MCLE event with box lunches for attendees.  Judge Burke, Judge Picquet, and court CEO Susan Matherly displayed some of the courtroom "bells and whistles" in Department 2 (carbon copy of Department 1), with Julie Vierra providing the courtroom clerk's perspective.  Those in attendance were impressed with the "electronic whiteboard," which Judge Picquet anticipates may quiet trial attorney squabbles over opposing counsel marking up exhibits.  The whiteboard allows drawings to be capture electronically and saved on the clerk's computer.  The image on the whiteboard can then be marked without permanently altering a party's exhibit.  The courtroom ELMO system can be used to display not only documents but objects (keys were used for demonstration) that would be difficult to photocopy and display to jurors.  Although Department 1 is set up for video conferencing, Judge Burke has not yet had the opportunity to use it for hearing purposes.  He expressed hope that within the next few years, attorneys will be able to make video appearances for Paso hearings.

After making the courtroom presentation and allowing everyone to finish lunch, the judges took everyone a tour of the rest of the courthouse.  Although Judge Picquet swore us to secrecy )knowing that some of the other SLO County judges haven't seen them yet), the chambers at the courthouse seem big enough to use for three-on-three basketball.  However, it was pointed out that chambers provide a "view" of the 10th Street carwash.  Adjacent to chambers is a bailiff post that can be fully secured if necessary.  Moving downstairs, the judges pointed out the court file viewing room that can be observed from the clerk's office to ensure that court documents don't go missing.  We also got a view of the staff area and the offices that host courthouse IT and provide room for court research attorneys who occasionally leave their Palm Street quarters.

In a post-tour question and answer session, the judges addressed future judicial assignments at the new courthouse.  Assignments seem somewhat up in the air for the civil department but Judge Burke seems to feel confident that he will be a fixture at the courthouse for the foreseeable future to provide continuity to those involved in family proceedings.  Judge Burke expressed his view that the state is unlikely to see another new courthouse project for years, emphasizing again how fortunate we are to have this new facility right here in Paso.

Read More
Utilization of the Reverse QTIP Election (Sounds confusing but could save you tons of money)

A QTIP trust allows a deceased spouse to maintain a certain level of control over the final disposition of his or her property while still qualifying for the unlimited estate tax marital deduction. However,one oft overlooked problem is the failure to appropriately plan for the tragic death of a child beneficiary. In general if a child beneficiary passes away prior to receiving his or her interest in the QTIP trust, the property passes to his or her kids. This is called a skip transfer resulting in the application of the generation skipping transfer tax ("GSTT") (taxed at the same rate as the estate tax).

Basically, the GSTT functions to capture the estate tax that is avoided at the skipped generation. If the child does not receive it but the grandchild does, such property is not taxed in the child's estate. Well, the IRS says such property should be taxed as if it had been included in the skipped generation's estate.

As with anything, the IRS is kind enough to offer an exemption. Currently, the GSTT lifetime exemption tracks the estate tax exemption, so for 2009, it is $3,500,000 per individual. However, since a QTIP trust is not included in the deceased spouses estate, no portion of his or her GSTT exemption is applied to the QTIP Trust. Imagine the following scenario:

Survivor's Trust = $1,000,000.00

Bypass Trust = $3,500,000.00

QTIP = $2,000,000.00

So, upon the first death, Bypass trust utilizes decedent spouses estate tax exemption, and the QTIP qualifies for the estate tax marital deduction resulting in no estate taxes at death. As per the standard course, the trust document provides that decedent's GSTT exemption shall be applied to the Bypass trust as needed. For simplicity purposes, assume this is the ultimate distribution scenario upon the second death:

2 children living and one deceased child leaving 3 surviving issue. Everything distributed equally from each trust. Assume date of death values of the trusts at the following:

Survivor's: $9,000,000.00

Bypass: $4,500,000.00

QTIP: $6,000,000.00

So, from each trust, the following amounts are allocated to skip persons, i.e., grandchildren resulting in imposition of the GSTT

Survivor Trust to Grandchildren = $3,000,000.00

Bypass Trust to Grandchildren = $1,500,000.00

QTIP Trust to Grandchildren = $2,000,000.00

Now, combined, husband and wife have, in 2009, a  GSTT exemption of $7,000,000.00. Above, the survivor has made $5,000,000 in GSTT transfers and the decedent spouse made $1,500,000. Since the exemption is limited to $3,500,000 per individual, and since, for tax purposes, the surviving spouse is considered the transferor of the QTIP Trust property, $1,500,000 is likely subject to the GSTT, at an applicable rate between 40-50%.

Could this have been avoided? Yes. Utilization of the reverse QTIP election magically makes this tax headache go away. Give us a call if you want to know how to ensure you have the Reverse QTIP protection.

Read More
Control vs. Compassion: California Cities Struggle With Conflicting Medical Marijuana Laws

As a result of recent developments and pending cases affecting this very issue, the ability of cities and counties to prohibit medical marijuana dispensaries will be the new focus in the controversy over medical marijuana, with a case involving the City of Anaheim’s ban on medical marijuana dispensaries, set for oral argument in a State Court of Appeals in August.  For now, the issue of whether Proposition 215, otherwise known as the Compassionate Use Act, is preempted by Federal law, as well as enforcement by the DEA has moved to the back burner.

In May, 2009 the U.S. Supreme Court declined to review a case involving the County of San Diego (Count of San Diego v. San Diego NORML).  The San Diegocase involved the requirement in statutes implementing Proposition 215 that counties in Californiaissue identification cards to qualified medical marijuana users.  The Counties of San Diego and San Bernardinochallenged the law on the basis that the Federal Controlled Substances Act preempted the State laws.  In July, 2008 the Fourth District Court of Appeals, in a narrow ruling focusing on just the ID card requirement, and not the broader issue of the validity of Proposition 215, and ruled that the State law pertaining to the ID card requirements was not preempted.  Subsequently, the California Supreme Court declined to review the case, and on May 18, 2009 the U.S. Supreme Court also denied Certiorari (US Supreme Court review) in the case.

The main issue for local agencies has been determining how it should regulate medical marijuana "dispensaries.”.  Many local agencies find that they are caught in the middle between Proposition 215, which exempts qualified medical marijuana users from criminal sanctions under State law, and the Federal Controlled Substances Act, which prohibits any use of marijuana whatsoever, medical or otherwise.  Dispensaries are often run as storefront operations, and local  law enforcement agencies often believe that the dispensaries are skirting the law, claiming to be “caregivers” to satisfy the requirements of Proposition 215 and it’s implementing statutes.   This last summer, the Attorney General’s Office weighed in, issuing guidelines in August, 2008. Unfortunately, the guidelines appear to make most storefront dispensaries inconsistent with State law.  Nonetheless, a great many dispensaries are in operation (for example, a recent article in the L.A. Times indicates that more than six hundred operate in that city alone!).


 

In any case, many cities throughout the State have struggled with how to deal with requests to open medical marijuana dispensaries.  Some agencies have taken a regulatory approach, permitting them, subject to compliance with various local permitting, zoning and performance standard type regulations.  Others have chosen to wait for clarification of the laws relating to medical marijuana, and have adopted moratoriums on the establishment of such dispensaries.  For example, in May, 2009, after receiving a request to open a dispensary the City of Guadelupe adopted such a moratorium.


 

In San Luis Obispo County there has been the well publicized federal prosecution of a Morro Bay dispensary operator. Recently, however, the Obama administration has indicated it will no longer conduct raids targeting such facilities.   Many other cities in the County have adopted bans on dispensaries, including Arroyo Grande, Pismo Beach, Grover Beach, and Paso Robles.    The City of Anaheim’s ban was challenged by a group called the Qualified Patients Association in 2007 and a trial court ruled in the City’s favor in February, 2008.  That case is currently pending in the 4th District Court of Appeals, with oral argument in the case scheduled for August 19, 2009.  This decision may significantly impact the manner in which our local agencies address the medical marijuana issue. So, stay tuned, as the drama over medical marijuana and the dilemma faced by cities and counties continues to unfold…


– Posted by David H. Hirsch, Attorney at Law


dhirsch@carnaclaw.com

Read More
Bad Housing Market Allows for Possible Tax Savings

As everyone is well aware, the housing market has tumbled a bit over the last two years, and home values have fallen substantially, in some places by as much as 30-40%. Is there any silver lining to be found? Sure.

When a person talks in terms of estate planning, lower values are beneficial as the estate/gift tax levies against the transfer of wealth. The lower the wealth, the lower the gift or estate tax. Accordingly, transferring a personal residence (often the biggest asset in any person's estate), after it has decreased in value could allow for substantial tax savings. How? The following discussion provides one tax saving mechanism utilized by people who expect to have a taxable estate when they die.  

Qualified Personal Residence Trusts

A married couple or an individual can dramatically reduce the overall tax costs of passing property to children or other beneficiaries by transferring a personal residence to a qualified personal residence trust ("QPRT"). In a QPRT, the creator retains the right to occupy the residence for a fixed period of years, at the end of which it will be retained in trust for the benefit of others or will be distributed outright to the children or other designated beneficiaries. Importantly, a couple or an individual can transfer a principal residence, a vacation home, or both, to a QPRT. (Each individual can create up to two QPRTs.)

QPRT Description

A QPRT is simply an irrevocable trust to which an individual (the "grantor") transfers a personal residence, reserving the right to occupy the residence for a term of a certain number of years. At the end of the term, the trustee of a QPRT either distributes the residence to the designated beneficiaries – usually the grantor's children – or retains the residence in trust for later distribution to the beneficiaries. If the trust continues, the trustee can lease the residence back to the grantor at a market rental rate without causing the residence to be included in the grantor's estate.

Minimal Gift Tax Cost

For federal gift tax purposes, the transfer of a residence to a QPRT involves a gift by the grantor of the actuarially determined value of the right to receive the property at the end of the term. Therefore, the amount of the gift is not the full value of the residence. Instead, the amount of the gift is the value of the residence reduced by the value of the grantor's retained right of occupancy. Here the grantor gets a tremendous break – the value of the grantor's retained right of occupancy is calculated by applying the current federally prescribed rate of interest to the full value of the residence. In essence, the interest retained by the grantor is treated as having a value equal to the present value of the right, for the term of years, to receive interest at a fixed rate on the full value of the residence at the time the QPRT is established.

The value of the taxable gift may be further reduced by providing the grantors with a retained reversionary interest for the fixed term, or a general power of appointment. However, one wants to tread carefully as the 3 year lookback provided by I.R.C 2035 may extend the grantor's required survival time by an additional 3 years beyond the fixed term to maintain the tax benefits of the QPRT.

Finally, QPRT's may be set up with fractional interests in real property. When a grantor transfers only a fractional interest in real property multiple valuation discounts are allowed, including, but no limited to, the tenancy in common discount. This could provide an additional 20 to 40% decrease in the amount of the taxable gift upon creation of the QPRT.

 

Potential Estate Tax Savings – Little or No Downside Risk

If the grantor survives the term of a QPRT, none of the date of death value of the residence is includible in his or her estate for federal estate tax purposes. There is essentially no downside tax risk: If the grantor dies during the term, the tax position of the grantor is no worse than if the QPRT had not been established. In such a case, the full value of the residence is includible in his or her estate. Below is an example illustrating how creating a QPRT can reduce the grantor's estate tax liability by almost $1 million:

Example:

Parent (P), age 60, transfers his vacation residence, worth $1 million, to a QPRT. Under the terms of the QPRT, P retained the right to use and occupy the residence for 12 years, after which the trustee was to distribute the residence to P's daughter (D). Assuming P's retained interest was worth $682,924, P made a gift to D of less than one-third of the present value of the residence – only $317,076. The gift tax cost of the gift is offset by applying part of P's unified credit against the tax. For gift tax purposes, each person has a unified credit which is equal to the tax cost of making a taxable transfer of $1,000,000. If P outlives the QPRT's 12-year term, the residence will not be included in his estate for tax purposes, even though its value may have increased to $2 or $2.5 million. On the other hand, if P dies during the 12-year term, the value of the residence will be included in his estate for estate tax purposes.

If P does not create a QPRT and retains his residence until his death 12 years later, when the residence is worth $2.5 million and he owns other assets worth $3 million, about $900,000 in estate taxes will be due from his estate. (This assumes that the estate tax will remain in effect after 2009 and the unified credit will shelter up to $3.5 million.) On the other hand, if P transfers his residence to the 12-year QPRT described above, lives for more than 12 years, and dies leaving $3 million in other assets, no estate tax will be due on his death. Of course, if the residence were included in P's estate for estate tax purposes, its income tax basis would be increased in the hands of the beneficiaries to its federal estate tax value in P's estate – $2.5 million. If the residence is transferred to a QPRT and not included in P's gross estate, the basis of the residence would not be increased by reason of P's death.

Rules Regarding QPRT’s

The present law allows each individual to transfer no more than two residences to QPRTs, one of which must be his or her principal residence. A personal residence subject to a mortgage can be transferred to a QPRT, but the tax consequences are more complicated (additional gifts that require gift tax returns to be filed may take place each year in which the grantor makes payments on the mortgage). Overall, the tax results are simpler and better if an unencumbered residence is transferred to a QPRT.

In general, a QPRT cannot hold any property other than one personal residence, which may include related buildings that are used for residential purposes and land reasonably appropriate for residential purposes. Thus, furniture and furnishings cannot be transferred to a QPRT. If a residence held in a QPRT is sold during the grantor's retained term, the proceeds must be (1) reinvested in a new residence within two years, (2) converted to a qualified annuity payable to the grantor for the remaining term, or (3) distributed to the grantor. If a residence is sold during the term of a QPRT, the grantor is treated as having made the sale for income tax purposes. In most cases, the grantor, who is treated as the owner of the residence for income tax purposes, can exclude up to $250,000 (or $500,000 for married couples) of gain on the sale of a personal residence held in a QPRT.

Read More