Property Taxes and Buy-Sell Agreements in Probate, with Attorney Connor Inlow

0:03 So, it's not enough just to have a an estate plan or a plan, but [clears throat] you want to have the right plan for you. And the more complicated, the more pieces of the puzzle, the bigger the wealth, the more the issues come up with taxes, income taxes, estate taxes, property taxes, and the more complicated perhaps the assets are in disposing. I'm really excited to have back today Connor Inlow, who's an attorney at TLD Law. Connor, thanks for joining us again.

0:28 Thanks, Bill. Thanks for having me. Good to see you again. And most important thing to say is to count as a fellow Trojan fight on and [clears throat] also went to school Loyola where I was my swim team at the LMU swimming pool there. So we share some geography at least.

0:44 Yeah. Fight on. So let's talk a little bit about real estate. I think one of the things that when we do succession plans, it's one thing to say, well, I want to give everything to this person, that person, and so on. But there's also tax implications and how you give it. I know a common one I've seen is where maybe a property has be split three ways but giving three different parties the same a share of the property can create some unintended tax consequences. Let's talk a little bit about the property tax implications in distributing property. How would how would one avoid unnecessary taxes or what do you do once that happens to unwind the situation?

1:18 Yeah. Yeah. It's a it's a big problem. We see it all the time in our estate planning department or just clients coming in getting a huge supplemental tax bill and they want to know how to fix it. And so, you know, it's a self-s serving answer, but I would say consult an attorney or consult someone, a tax advisor of some sort before taking anyone off title or putting anyone on title. a common problem we see is that people try to do their estate planning rather than through their trust. You know, they want to do it early. they want to give, you know, gift properties or add their children to title. And, you know, Prop 19 is really one of the few ways you can transfer property without getting a full reassessment. And that has really tight deadlines and obligations. And so, unless it's a primary residence of both the transfer and then one of the children or grandchildren in some exceptions make it their primary residence within one year, you won't get that. and that all needs to be filed with proper paperwork within three years. and if the move in hasn't occurred within one year to make it your primary residence, it can be denied. And so the short of it is is trying to do early estate planning can actually trigger a full reassessment of the property taxes and make you miss Prop 19. And then not only do you have to pay those property taxes, you know, as long as you own that property, but also for capital gains, you won't get the full step up in basis that you would have received if you waited until passing.

2:44 And so it trusts are always better and consulting attorneys are always better to give you the best capital gains and property tax avoidance strategies and doing it on your own can create problems that are sometimes difficult to unwind. I know you mentioned about what you can do if it happens. You can contact an attorney if you do qualify for an exception or an exclusion from reassessment. You know, the attorneys can help you file the paperwork to try to claim those. If you don't qualify for any, the one option you have is what's called a rescission deed. And those aren't always accepted. They have to be filed within a reasonable amount of time. But you can unwind the transaction even if your reason for doing so is just that we made a mistake and reassessed our property and we didn't want to do that. but it doesn't always work if you don't do it in a timely manner and it's going to be expensive and take time to get it fixed because the assessor's office is, you know, backlogged and they're not going to be able to take a look at it and fix it in short order and you might have to pay a couple higher tax bills even before it gets fixed. You know, the common case I see is a do-it-yourselfer who you know, mom is sick, she's scared, so she puts you know, the oldest daughter, son title the property at the same time and lives about five or six years. The house goes up in value, maybe $200,000. And now a couple things happen. One is when they sell the property, this the son has to pay the taxes on from the time they took over the property. That's profit to them. now. Whereas, as you mentioned, if you wait till the time of death, they get the free step up, but they already got the property, so they don't get the step up.

4:19 And then the reassessment is a real killer because the county will go back. I had a client where they went back like 13 years and reassessed. It was a tremendous amount of money. I mean, it was just staggering what they owed as a result.

4:32 Yeah. The assessor's office can go back often. I believe it's around 5 years typically, but if they think that there was fraud or misfiled paperwork for any intentionally misfile, they can go back as long as they want. And so, yeah, to your point, if it's if the assessor's office is aggressive with going back, they can issue escape assessments, you know, 5, 10, 13 years back and that can be almost impossible to, you know, the liquidity to pay it all. I mean, you have to take loans basically to make the lumpsum payment and if you don't make timely payments, you know, they can charge penalties and so it only gets worse and they can put liens on the property. There's secured tax bills. So, you know, it could end up in foreclosure if you're not careful in a, you know, real nightmare scenario. And then another issue I see a lot with the transferring of properties is using joint tenancy. there are instances in which it's okay to use joint tenancy but putting siblings on as joint tenants doesn't always do what I think the families intend because then it's really a risk of who outlives each other as among the siblings and it can end up with you know the issue of one of the siblings amongst let's say five you know brothers and sisters one of them ends up with the whole property and then the descendants of the other four end up with nothing and no legal claim to that and that may not have been what they intended. And another part of the issue with property tax is is the severing of a joint tenancy triggers a reassessment. So it's difficult to even put unwind that without a reassessment and to put it into your trust. I mean you have to sever the joint tenancy. It just creates problems. So before you use joint tenancy, I would also recommend consulting someone because I see it creating more interest in people than expected and parties don't realize the implications of the joint tenancy both from a property tax and a succession plan.

6:23 Yeah, I think I didn't know that though. If you have a property and you hold it as joint tenants and then you say to your partner, okay, I don't want to do joint tenants anymore. I want to do both as sold and separate. That triggers a reassessment. Yeah, I want to be clear. There are there are numerous exceptions to that, but the general rule is this the creation or termination of a joint tenancy triggers a reassessment. So unless you qualify for an exclusion and you can show that,

6:46 You know, the assessor's office is they don't have time to look into the fine details of every deed that's transferred. So they're quick to reassess. And so right there are difficulties. It seems to me I you know and I actually had a train who said he confirmed this that the county will assume every reassessment every change ownership creates reassessment and send the notice out to make you defend it and there's a clock by which you have to defend it by and if you look at go that's stupid because two things one I know that you know it shouldn't require I have an exception and two I filled out a form back then so I don't need to do anything well that's a mistake not doing right? That what should somebody do when they rece when they receive a reassessment where they either A believe they have a viable exception or B they fill a preliminary change of ownership form at the time they did they filed the deed but somehow the LA county hasn't even looked at that form yet.

7:42 Yeah. No, it's a great question. It's a problem we see all the time. so you can use two pretty simple examples. I mean transferring your property into your trust if you're if you know you're the present beneficiary of a revocable living trust. it doesn't trigger a reassessment according to the tax laws. Similarly, if you transfer your ownership into an LLC, but you're the sole owner of the LLC, it won't trigger a reassessment. But, you know, you can fill out the preliminary change in ownership report and, you know, check the box that says a proportionate transfer to an entity or, you know, just transfer to my revocable living trust. And you would think that that would be sufficient, but we see most the time that the assessor's office will then send a follow-up letter to the taxpayer saying, "We need a full copy of the trust or we need a full copy of the signed operating agreement." And if that request for further information is not timely responded to, they will reassess it in full and just wait for you to contact them to fix it. And so what I would recommend is one of basically twofold is one with the preliminary change ownership report you can attach additional documents and we do sometimes where we will attach the trust or attach the operating agreement as one example and give it to them in advance. But then two is just making sure that you're aware of any notice you get from the assessor's office. You know we all have this problem I think of not checking our mail carefully. We probably get a lot of junk mail. If it's from the assessor's office, you should read it carefully and if there's any concerns, you should contact someone to help you understand it because sometimes it's something as simple as just providing them requested information. But if you throw out that notice and then you don't take any action on it, you're going to get a supplemental tax bill as the next notice and that's going to be very painful.

9:24 Yeah. There's never any good again. I think that it's one of those things where customers call and they're upset and you have to explain to them, "Well, that's just how the county works, but you still have to protect yourself." It's one thing to say, "Oh, they're the bad guys and I did everything right." Okay, well, you can be right in your mind. You know, you, one of my early coaches said to me, you can be right or rich, but you can't [laughter] really be both. And he's right that, you know, even though you might be right, when you get those letters in the mail, you need to take appropriate action, protect yourself, because the county assessor, they're not playing around. They're going to get paid. If they can, they're going to get paid. And so you need to do everything you can't to take the power out from your hands.

9:58 Yeah. No, I certainly agree. I mean, I have [clears throat] clients complain to me about, you know, the assessor office all the time. And I mean, I work with them on a daily basis, so I can understand, but it's, you know, they have a hard job. I don't I don't know the numbers. I don't know how many deeds are recorded every day in LA County, but it's too many for them to understand every detail of who the parties on both sides of the transaction are every single time. They don't have the time, the money, the resources to do that. and it they get paid more if they get the reassessment. So, it's really it's on the taxpayer to affirmatively show every time why they met some exclusion otherwise you have to expect the reassessment.

10:36 I will say having you doing real estate in various counties seems to be LA County does a really good job like 99% of the time for such a huge volume we have better I think resources and information and systems and procedures than most counties do because of the size. Maybe we can be more sophisticated, but when anything's off the track, it's like impossible. The work involved to get people back on and just get on it right away. There's no there is no solution other than just doing the heavy work of getting it back on the track. I think

11:04 Yeah, you just got to be persistent and, you know, you got to make their job easier really is how I look at it because they don't if you can explain it to them in, you know, as clear and concise and simple language and send them just the documents they need and, you know, map it all out for them. You know, they typically they always overturn it when you can show them that you were entitled to something, but it's it's up to the taxpayer to make that showing. So,

11:27 One of the other things I know you deal with quite a bit is business succession planning, business succession administration. You know, as a real estate agent in probate, one of the things I often get is you know, decedents who are partners in property and the partner, you know, won't want to do what the state wants to do. Now, I'm not I'm not party. I'm the agent that the estate hires theoretically to sell the property and the partner, you know, will call me and say, "Well, you know, you know, so and so always wanted to do it this way." And I and I have to politely say in essence, I'm sorry, but so and so has passed, and now, you know, you have an agreement that covers this, and the agreement says, "This is the process we have to go through, and they've hired me to sell the property, and I'm sorry, that's just how it worked. You could have written a different agreement, but that's what you signed." And so talk a bit about succession planning and how that works in businesses and real estate that it, you know, the plan that works best maybe when both people are living may or may not be the best plan when one is passed. Your job is to try to figure out how to write an agreement that covers both of those realities, but you can't really pick one because you'll get that choice.

12:37 Yeah. Yeah. No, it's a great question and I'm sure as you know, you know, a lot of whether it's a business or real estate, a lot of real estates are held in entities and LLC's and so, you know, they're they're often intertwined and they, you know, the same kind of best practices [snorts] apply for both. And even if you don't own it in an entity, you can have a tenants and common agreement that allows for a lot of the same estate plan. I guess it's not estate planning, but basically business succession planning that applies to both them. Really, there's three major agreements. I mean, you have the buy sell agreements if it's a corporation. we can get into it if you want, but I don't recommend for the most part for people that own real estate in a corporation. LLC is typically better for tax purposes. however, just for business succession plannings, it's called a stock buyell agreement or a shareholders agreement. And in it, you'll have basically trigger events upon, you know, certain events will trigger buyout mechanisms. And you can have exact detailed you know valuations of that shares, the valuation date, the terms and conditions of the payment and basically it will you know a most a very common way of doing that is having you know death or disability or you know them resigning from whatever the business is. any condition you and your partner see fit will trigger that buyout mechanism and then that will allow you to pay out the you know the estate basically so that you know you're not you're not causing a forfeite from the per person who's passed away. their family will get the fair market value of those shares, but the business will stay held by the people who actually run the business.

14:13 And you won't need to, you know, potentially get into business with someone's, you know, son who maybe has no experience in the business, has no desire to be in the business, and then you're stuck with no mechanism to handle that. And then it's the same idea for an LLC. It's called the operating agreement. It's the basic governing structure of the LLC. And it should have the same provisions really upon what happens when someone passes away. Because to your point, if there is no agreement between you about exactly what to do and how to handle someone passing away, it's their estate plan or you know their trust, their will, or even the intestate laws will determine where those interest goes. And it doesn't matter what you verbally said to each other or what you think they would have wanted. You're stuck with whoever inherits those shares and there's no mechanism to handle that. So now you're in business with them whether you want to or not. And they have all the rights of a shareholder. They have all the rights of LLC member. And so, you know, you need to you need to think about that basically. And I would make sure if you haven't had your operating agreement or buy sell agreement looked at recently or a tenants and common agreement, if you don't have an agreement amongst your business members to start thinking about doing it sooner than later because the, you know, the price to go to an attorney and have them draft that up for you is negligible compared to what the consequences might be if something were to happen. And now there's no mechanism to figure out what to do with the business going forward.

15:33 I'm involved in a case now where it's going to trial. So I'm sure both parties are into legal fees. I would I mean I don't know numbers, full disclosure, but I can kind of guess the math. It's got to be about $100,000 each for a property that's worth maybe a million dollar, maybe $100,000. And the thing about it that struck me was the operating agreement was perfect for when the decedent was live. He was a real estate guy

15:58 And he was a wheeler dealer and he accumulated a bunch of property and a company property managed and so for him, you know, having real estate and having him as a partner, of course, you have to worry about it because, you know, he'll be your partner because he's the kind of guy you'd want to own property with. His son is not all interested. He has no interest in real estate. You he has he's risk averse. He has other family issues going on in his life. To him, it's just money and he wants to provide for his family. And so that the anticipation it was like the great agreement for when they work together turns out to be the wrong agreement I think and you mentioned several different options. I think people feel like I can go online and get an agreement. The answer is yeah it will have some of those options as default but the question is are those the right options for you? What do they mean? And let's go through some scenarios to understand them. So talk a bit about the process when somebody comes to you. How do you kind of coach them up or help them understand that there's multiple options here, but they need to pick the right one for them?

16:56 Yeah. Yeah, it's a great point and I mean the risk isn't just with the, you know, the party who passed away. I mean the, you know, whether it's an optional or mandatory buyout needs to be really heavily considered and then upon what payment terms because, you know, you could think about it if it's a commercial property that's really increased in value. Let's say it's, you know, a $20 million property and there's two owners and you draft the operating agreement where if someone passes away, the other has the other member has an individual responsibility to buy them out for their fair market value. I mean, that's a $10 million obligation contract that the estate of the other member can enforce against you. And so that's that's scary. And so you need to be work with an attorney to make clear about whether you want these to be optional, whether you want them to be mandatory. And then if you cannot fund that buyout, what are the other options? Do you have the right to force the sale of the property? Does the estate have the right to force the sale of the property? Do you should you get life insurance on both members to make sure that those funds are there? and then they're paid out to the extent of those life insurance policies. other options are, you know, having payments over time because the liquidity problems of having to pay in a lump sum can cause really big problems for, you know, the estate would love to have the full amount paid, but if the money is not there, it doesn't help anyone to have that obligation. and so you need to kind of understand the business and the value of it and the, you know, the profitability of it. And you know, I think you also need to check in with your attorney over time because when it starts up and it's small kind of mom and pop shop potentially, you can have a promise to basically buy them out in a lump sum. But if you grow and scale and it gets bigger, it you need to relook at those things and consider life insurance, consider payments over time, considering turning any mandatory obligations to optional. And those are the kinds of things that you would want to look at. typically we don't like to advise our clients to draft anything that has mandatory obligations on them or the company if they don't have certainty that they can meet it. So instead we like to have more right of first offers right of first refusal options where they have you know 60 days to figure out if they want to proceed along the terms of the agreement but they have the right to say no because it's way better to let someone inherit it than be on the hook for an obligation that you have no ability to comply with. So,

19:17 Right. I think that's the main reason why a lot of these sports teams went from being familyowned to big corporations because, you know, when you have billions and billions of dollars, you have four kids, you split it up, you have estate taxes, due, they couldn't possibly meet the obligations of passing it down. They'd have to look, you know, the Dodgers just didn't have extra billion dollars in property, I mean, in cash to pay out of a business that's really based on appreciation. And so, same with individuals. You see, you know, real estate appreciates, businesses appreciate. They don't usually have cash in the bank worth half what the company's worth. They have

19:51 Maybe 10% or less. You know, they have inventory, you have equipment, you have buildings, you have brand, you know, IP that's worth millions of dollars. You might not have but a million dollars of cash in the bank at a time. And that's why these things become important. So, well, look, I appreciate we had a chance to you cover two main issues. Property taxes I think is a big issue that is very complicated and needs to get proper planning and then I think business succession is one that I've seen overlooked and leads [snorts] to real problems especially emotionally because people spend their life creating a business and they want it to continue but if you want that legacy continue you have to plan for that and prepare for it. It's not such a simple thing. Connor Inlow is with TLD Law and is a transactional attorney specializing in real estate transactions and related things business planning succession property. Thank you so much for being with us, Connor. I really appreciate the chance. If you want more information, the website is tldlaw.com and you can you can re reach him at tldlaw.com as well. If you if you drive you can't get that, feel free to reach out to me. I'd be glad to make that connection. Connor, thanks again for joining us. I really appreciate your time as always.

20:59 Yeah, my pleasure. Good talking with you, Bill. Hope to talk to you again soon. All the best. Bye-bye. And for the rest of you, this is Probate Weekly. We get together every week with attorneys talk about probate issues, both avoiding probate, what to do when you're in probate, and this case, we have some good issues on how to avoid having to pro to fight having to go to probate court to fight out situations you don't want or suffer the consequences of a lack of planning. I hope you enjoyed it. I did. Love to get your feedback, comments, questions, like this, subscribe, share it. If I can help at Bill Gross Probate on social media, as always, make today your best day ever. Thanks so much.