Author: Hoffman Forde

New ADU Laws in California: What You Should Know

Posted on October 25, 2023 by - Law

California is in the middle of an affordable housing crisis. City populations have swelled, along with home rental prices. The effects of a general lack of affordable housing are dire, pushing residents toward financial hardship and even homelessness.

In response to this crisis, state and local lawmakers are looking into accessory dwelling units (ADUs) to alleviate the pressure. As a cheaper and more flexible alternative to constructing new multi-family apartment buildings, ADUs are a viable way to add housing quickly. To promote new construction, the state legislatures have passed several new laws to reduce barriers and ease restrictions.

Here are some important changes to California ADU law that took effect in 2023.

Relaxed Height Restrictions

Despite the benefits of adding ADUs, not every community is on board with the idea, and some local governments have tried to deter homeowners from building ADUs by imposing restrictions such as on the maximum size of the dwellings. Under the changes included in Assembly Bill 2221, local authorities may impose height restrictions on ADUs, but they may not set a maximum height less than 16 feet. 

Additionally, there are circumstances where the limit is even higher:

  • If the structure is located within half a mile of a public transit stop: 18 feet
  • If the property already has a multi-family dwelling that is at least two stories tall: 18 feet
  • If the ADU is attached to the primary dwelling: 25 feet (If allowed by zoning laws for the primary dwelling)

60-Day Permitting Rule

Since 2020, state law has required that local permitting agencies either approve or deny a permit to build an ADU within 60 days of receiving the application. With the surge in applications, many agencies denied permits for little reason, just to avoid violating the 60-day rule. 

The new rule requires agencies to list their reasons for denying a permit. This is intended to force the agencies to take a closer look at each application and only deny them for good cause. Also, the scope of the 60-day rule has been expanded to include more entities, such as utilities and water districts.

Front Setbacks

Some local agencies denied ADU building permits based on setback requirements (the distance from the structure to the property line). Under the new changes to the law, if an ADU is no greater than 800 square feet in size, local authorities may not impose a front setback requirement. They may still impose rear and side setback requirements of no more than four feet.

Fire Sprinklers

Building an ADU used to trigger a Group R occupancy change for the property, requiring fire sprinklers to be installed in the primary dwelling. That is no longer the case.

Denials Based on Unpermitted Work

Formerly, ADU permits could be denied because there was existing unpermitted work that had been done to the property. Now, they can only be denied for this reason if the unpermitted work is a safety or health concern.

Demolitions

Many homeowners want to demolish or convert existing structures, such as garages, to build an ADU. To discourage this, some local agencies approved the building permit but refused to provide the demolition permit. Under the 2023 changes, cities cannot withhold a demolition permit if they have already approved the ADU permit.

Talk to a Real Estate Specialist

Building an accessory dwelling unit is a great way to alleviate the housing crisis and provide extra income to homeowners. The latest changes to the law make it an even more attractive option. However, even with the easing of restrictions, there are many bureaucratic rules to navigate, and local permitting agencies may continue to obstruct ADU construction. 

With the help of an experienced real estate attorney, you can clear these hurdles and get your project moving forward faster. To speak with a member of our legal team, schedule an appointment today.

Unlawful Detainer in California and How to Protect Yourself

Posted on October 24, 2023 by - Landlord/Tenant

eviction notice

Evictions are a nightmare, with many people rating it as the all-time most stressful experience of their lives. Even for the landlords themselves, usually, it is unpleasant and something to be avoided if possible.

If you are a tenant on the receiving end of an eviction notice, here is some important information about unlawful detainers in California.

What Is an Unlawful Detainer?

“Unlawful detainer” is the legal complaint a landlord must file with the court to have someone removed from their property—i.e., evicting that person. In effect, it is seeking a judgment that the tenant has no legal right to remain on the property. The most common reasons for filing an unlawful detainer complaint are (alleged) failure to pay rent, failure to adhere to the terms of the lease, and failure to vacate the property at the end of the lease term.

Common Defenses to Unlawful Detainer

Just because you’ve received an eviction notice doesn’t mean you necessarily have to leave the property. After all, you still have due process rights to challenge the legal basis of the eviction. Here are the most common defenses to an unlawful detainer complaint.

1. Already Paid Rent in Full

If the basis for filing the unlawful detainer was a failure to pay rent, then proving that you have in fact, paid the rent is a complete defense. Landlords must give tenants at least three days’ notice to pay the rent (a Notice to Pay or Quit) before proceeding with the eviction. You cannot be evicted if you pay the rent within that time.

 2. Fixing Violations of the Lease

If the landlord alleges that you have violated the terms of the lease, they may give tenants a three-day “Notice to Perform Covenants or Quit.” This notice must identify what the tenants have done to violate the lease and give them three days to fix it. For example, if the lease prohibited pets, the tenant would have three days to remove any pets from the property.

In the case of serious violations, however, a landlord is not required to allow the tenant to fix the problems. Examples of this include:

  • Conducting illegal activity on the premises (such as selling drugs)
  • Causing significant damage to the property
  • Endangering the health and safety of others

In these cases, the landlord need only serve a three-day Notice to Quit.

3. The Landlord Did Not Maintain the Property

Tenants may withhold rental payment if the landlord fails to maintain the property according to minimum livability standards. For example:

  • Failure to provide locks on the main doors
  • Failure to provide heating in cold weather
  • Failure to fully waterproof the roof and walls
  • Sewage backing up onto the property

4. Improper Eviction Procedure

Landlords may not resort to “self-help” eviction. That means they must give tenants notice, go through the unlawful detainer process to obtain a court order, and, if necessary, request law enforcement officials to remove people from the property. They may not skip the court process and change the lock while the tenant is away or remove their possessions.

Discuss Your Situation with an Attorney

California has robust legal protections for tenants, but you might never know about them or have any idea about how to protect your rights without the help of a lawyer. Our experienced attorneys know the unlawful detainer process inside and out; they can provide you with a practical assessment of your situation and a clear plan for moving forward. 

To schedule an appointment, contact our office today.

What to Know About Buying Rental Property Outside of California

Posted on September 29, 2023 by - Estate Planning

Real estate investment can be a great way to grow wealth and even provide a steady stream of passive income. However, as every Californian knows, real estate prices in the state are often prohibitively expensive, leaving many people with few options. As a result, it is often necessary to look outside the state for more affordable opportunities.

For those who are drawn to the idea of buying rental property outside of California, here are a few critical points to consider.

1. Know the Market

Real estate values vary widely from neighborhood to neighborhood, even street to street. Most of us understand this intuitively regarding the area where we live, but it can be easy to lose sight of this fact when searching for property in another city. Without local knowledge, it’s easy to get lured in by a “great deal” that turns out not to be so great. Alternatively, there may be a part of town where real estate prices will likely  skyrocket in a few years, but you wouldn’t know about it.

If possible, it’s better to buy property in an area that you are already familiar with. If not, it’s a good idea to get to know the place and try to be physically present as much as you can throughout the process.

2. Find a Good Agent

Having a real estate agent you can trust is always important, but it is doubly so for people buying an out-of-state investment property. Tying in to the point above, a good real estate agent can be an invaluable source of knowledge about the local market. They can guide you toward great opportunities and steer you away from a money pit.  The wrong agent, or even just an indifferent one, may prioritize closing the sale over looking out for your best interests.

What’s more, your relationship with a real estate agent can be a great start to building a local network of connections. From inspectors to contractors to property managers, you’ll need a lot of help to make your rental property a success, and a good real estate agent can put you on the right path.

3. Property Managers Can Be a Big Help

It will be tough to administer an out-of-state rental property on your own. For starters, someone has to be on hand to show the property, collect rent, inspect the property for damage, etc. If maintenance issues crop up, they must be dealt with promptly, which may be challenging to orchestrate from another state. Also, you’ll need to be familiar with state and local laws regarding leases, evictions, and more.

Hiring a local property manager simplifies all of this. For a fee, often a percentage of the monthly rent, property managers will find renters, oversee the signing of the lease, collect rent, send maintenance workers, and take care of other problems as they arise.

4. Tax Implications

Owning an out-of-state rental property can be a great investment, but it will complicate your annual tax return. If nothing else, you will almost certainly have to file a return in the state where the property is located. 

You’ll want to take advantage of deductions for depreciation and other associated costs, such as fees paid to a property manager. If you operated at a net loss for the year, you may or may not be able to deduct that loss from your other earnings (like salary). To navigate all of this without incurring the wrath of the IRS, you should strongly consider hiring a tax professional.

Talk to a Real Estate Specialist

If you are considering purchasing a rental property, whether it’s in California or elsewhere, our team of experienced real estate attorneys can provide the expertise and assistance to make the process go smoothly. From minimizing tax exposure to reviewing contracts, we’ll be at your side every step of the way. 

Contact our office today to start putting your investment plan into action.

4 Reasons Your Business Might Need a Lawyer

Posted on September 15, 2023 by - Business Consulting

As businesses grow, so do the legal complications and the potential pitfalls. For all but the smallest of these businesses, the question is not if your business needs a lawyer but when you should call in their services.

Most small to medium-sized businesses don’t need to hire full-time, in-house counsel.   Still, they should strongly consider forming a relationship with an outside attorney who is familiar with their operations and can provide assistance on an as-needed basis. 

Here are some of the top reasons your business might need a lawyer.

Business Formation

When your business is just starting, or if you are considering changing the way it’s organized, there are many decisions to make that can have significant consequences in the future. From a sole proprietorship to an LLC to incorporation, all of these structures have advantages and disadvantages in terms of taxation, liability, etc. It is a good idea to sit down with a business attorney to discuss your options and get help with the paperwork.

Similarly, if you are considering forming a partnership with other individuals, it is well worth your time to meet with an attorney and work out the details of an agreement. One of the best services a lawyer can provide in this situation is to help you and your business partners plan for potential conflicts and unanticipated events. What happens when one of you wants to sell their share of the business? What happens if one of you dies? How do you proceed if you disagree on important decisions? Understanding this in advance can save you a lot of grief in the future.

Compliance Issues

Spanning a myriad of areas, from taxes to HR to data privacy, compliance issues are the bane of many business owners. They are often viewed disdainfully as bothersome government interference that pulls resources away from the business’s core mission. Whatever your feelings may be on the topic, the consequences of noncompliance can be pretty costly for a business.

An attorney who understands how your business works can, first and foremost, bring compliance issues to your attention that you may not have even been aware of yet. Later, they can help you create policies and procedures that help keep your business on regulators’ good side.

Workplace Disputes

Employment law is a fraught area for businesses. Conflicts with and between employees have a high potential for future legal disputes. 

For example, firing employees is an unfortunate necessity that comes with running a business, and it should always be approached as the precursor to a lawsuit. Everything you do or say may come up later, so it’s essential to go by the book. However, that can be hard if you don’t know what rules to follow. Consulting with an attorney will help you navigate this situation without exposing your company to a lawsuit.

Similarly, dealing with problems between employees can be just as important. For example, if an employee complains that they were harassed in the workplace, it’s crucial to handle this properly and not just wing it. Draft policies in advance with the help of your lawyer, and then have their phone number ready if a situation arises.

Lawsuits

Some consider it a rite of passage or a sign of success when a business is sued for the first time. Indeed, the longer your business is around and the higher its profile, the more likely this will happen. 

If you or your business receives notice that it is being sued, the next thing you should do is contact an attorney. If your business already has a lawyer, you will be in a much better position than if you shop around for one while the clock is ticking.

Southern California Business Attorneys

Your business is too important to leave anything to chance. Having an experienced attorney who can advise you when needed is critical to protecting your business and building a sustainable foundation for future success.

Our highly credentialed attorneys have been proudly serving the Southern California business community for years. With broad-ranging experience in a variety of practice areas—from commercial real estate to civil litigation—Hoffman & Forde can provide the legal expertise your business needs.

What Does a Commercial Real Estate Lawyer Do and Do I Need One?

Posted on August 28, 2023 by - Commercial Real Estate

All real estate transactions are complicated, but commercial real estate tends to be much more so. Be it a lease or a purchase, the legal considerations are more complex, and there is generally more money on the line than in a residential real estate transaction. For these reasons, having the aid of a real estate attorney is even more critical in commercial real estate.

But what exactly does a commercial real estate lawyer do, and do you need one?

Contract Review

There are many potential factors to consider in a commercial real estate deal, from zoning restrictions to infrastructure requirements to maintenance responsibilities. If you plan to lease the property, you can’t make assumptions about what is or is not covered by the lease. Unlike residential leases where numerous consumer protections apply, in commercial real estate, you will be presumed to be knowledgeable about everything included (or not included) in the contracts.

A commercial real estate lawyer will be familiar with how these contracts work and can explain to you the benefits and drawbacks of each provision. You can know exactly what you’re getting into, which helps avoid problems further along in the process.

Negotiation & Closing

Commercial leases tend to be more negotiable than a typical residential lease, partly because there are so many more potential variables. For example, who is responsible for maintaining common areas, and is the landlord prohibited from leasing nearby property to competitors? Each of these variables can affect the value of the transaction for both parties.

An experienced attorney can zero in on these factors and ensure you get the best deal possible. The owner may be willing to make concessions or lower the rent in return for your assurances. Also, a lawyer who knows the market can help you spot a deal that  may be too good to be true.

Having an attorney is even more important if you’re purchasing the property. If you’ve ever purchased a house or apartment, you know how many steps there are before closing the deal. Commercial real estate is no different. Hiring a lawyer to help close the sale will save you time and effort.

Financing

Financing can be  pretty complicated in commercial real estate transactions, especially in the real estate development world. Owners, investors, brokers, and lenders may enter the picture, and boilerplate contracts simply won’t do. Commercial real estate attorneys can negotiate these complex arrangements and ensure you are protected in various contingencies.

Dispute Resolution & Workouts

Not everything always goes according to plan. Disputes arise between tenant and landlord, investors back out of deals, or sometimes business just slows down. A lawyer can help resolve these issues by negotiating with the other party (who often have attorneys of their own)  to minimize disruption to your business. For example, a landlord may be willing to accept lowered rent in exchange for a longer lease term. If the conflict can’t be settled, your attorney can  represent you in court.

Do You Need a Commercial Real Estate Lawyer?

Given the complexity and expense of commercial real estate transactions, it’s almost always worth consulting with an attorney specializing in these matters. They can review your paperwork and give you advice on how to proceed. Even this small amount of legal assistance can save you from major headaches later.

Our real estate team has years of experience in various areas, from representing clients in zoning applications to complex litigation. Schedule an appointment with our office to discuss your situation and explore your options.

Boundary and Title Disputes in California: Legal Insights

Posted on August 16, 2023 by - Residential Real Estate

Property lines are not always where you think they are, and sometimes, the owner of a piece of real estate is not clear. Such boundary and title disputes can completely upend your life, so it’s worth looking at some of their root causes and what can be done to resolve them.

What Is a Title Dispute?

A title dispute arises when two or more parties have competing claims to the same real property. For example, one person might build a house on a plot of land only to have another claim to own that very land. The legal proceeding for settling title disputes is called a “quiet title action” because the judge will determine the actual owner and therefore “quiet” any competing claims to the land.

Here are the most common causes of title disputes:

Boundary Disputes

Adjacent property owners can disagree on exactly where the boundary line is between their properties. See more details on this below

Problems with the Deed

Errors or discrepancies in the deed can create big problems later. Most commonly, the problem with the deed is an incomplete or inaccurate description of the parcel.

Easements

An easement is a non-possessory right in real estate, meaning the easement holder doesn’t own the land or have the right to live there but does have some right to use the land in a limited way. For example, a neighbor may have an easement that allows them to cross your property to access their land, or a municipal government may have an easement to build and maintain utility lines on your land.

What to Do in a Boundary Dispute

As mentioned above, boundary disputes are a type of title dispute in which two neighboring landowners can’t agree about who owns a particular part of their respective lands. Historical use, natural terrain features, and fence lines may contribute to this misunderstanding. The problem becomes even more complicated when one builds a structure, such as a home on the disputed part of the land.

If you find yourself involved in a boundary dispute, here is some guidance on handling the situation effectively.

1. Have the Land Surveyed

The first step in resolving the dispute is to determine where the official property lines are by commissioning a property survey. The surveyor will examine county records and plot out an accurate map of what you factually own.

2. Try to Come to an Agreement with Your Neighbor

It’s best to come to an amicable agreement with your neighbor if possible. This may be as simple as building a new fence or agreeing to stay off the property. However, some agreements, such as the granting of an easement, should be formalized in writing.

3. Bring in a Mediator

Sometimes, you may not be able to agree on your own, especially if structures are involved. Bringing in an outside mediator can often help both sides reach a reasonable resolution.

4. Litigation

Obviously, litigation is not anyone’s first choice; it’s expensive, time-consuming, and can breed animosity. In some situations, however, litigation may be your only recourse. If you haven’t already hired an attorney, you definitely should at this point.

Talk to a California Real Estate Lawyer

Real estate title disputes can be tricky to unravel, and they are best handled with the help of a real estate dispute attorney. Having a lawyer’s help can often prevent the situation from escalating and will ensure that your rights as a property owner are protected. To discuss your situation with an experienced professional and figure out how to move forward, contact our office today.

1031 Exchanges: What You Need to Know

Posted on July 20, 2023 by - Commercial Real Estate

Real estate investment is often an excellent choice for protecting and growing your wealth over the long term. When they are well planned, such investments can grow steadily in value and produce income in a predictable manner. 

A tax-deferred exchange, often called a 1031 exchange, can be an incredibly useful tool for anyone looking to manage the tax burden on their real estate investments, though the details can get complicated. Here we’ll explain the basics.

What Is a 1031 Exchange?

Named after Revenue Code section 1031, a 1031 exchange allows for “nonrecognition of gain or loss from exchanges solely in kind.” What does that mean? If you exchange one real estate investment property for another, any capital gains tax is deferred and the basis for the old property (i.e., the original purchase price, adjusted for costs of improvements, depreciation, etc.) is rolled over to the new property. 

Here is a stripped-down example that ignores complicating factors like depreciation and transaction costs:

You currently own property A, for which the basis is $200,000. You sell Property A for $250,000 and immediately reinvest the proceeds into purchasing Property B for $300,000. Typically, you would have to pay capital gains tax on the $50,000 gain you made on the sale of Property A, and the initial basis for Property B would be $300,000. 

However, if you file for a 1031 exchange deferral, you pay no capital gains tax (at least for now), and the basis for Property B would be $250,000 (the $200K basis from Property B + the $50K additional investment required for the purchase of Property B). If you were to later sell Property B for $400,000 and keep the proceeds, you would have to pay capital gains tax on the $150,000 gain ($400K – $250K) you made from the sale.

1031 Exchange Requirements

The IRS keeps a tight rein on 1031 exchanges, and several requirements must be met in order to qualify.

 

  1. Like-Kind Exchange
    This means the properties exchanged must be similar in nature. This is broadly defined so that any two investment properties within the United States are likely to be considered of like-kind.

 

  1. Must Be the Same Title Holder and Taxpayer
    The benefits of a 1031 exchange can’t be transferred to someone else. The title holder and taxpayer of the new property must be the same as that of the original property.

 

  1. No Property Held for Sale
    1031 exchanges apply to real estate held for business or investment purposes. If you are flipping houses, on the other hand, the deferral would probably not apply. 

 

  1. The New Property Must Be Identified Within 45 Days of Selling the Old Property
    The exchange does not need to be simultaneous (more on that below), but once you sell the original property you must identify the new property you plan to purchase within 45 days. This identification must be memorialized in a signed document.

 

  1. The Purchase Must be Completed Within 180 Days of the Sale
    The clock starts ticking once you close the sale of the original property. If you have not finalized the purchase of the new property within 180 days, you will have to pay capital gains tax on the proceeds.

 

  1. The Proceeds Must Be Held by a Qualified Intermediary
    The owner of the properties must never come into contact with the proceeds from the sale. Instead, the funds must be held by a “qualified intermediary.” This person or organization must be someone unrelated to the owner and has not had a financial relationship with the owner for the past two years. 

Types of 1031 Exchanges

There are four basic types of 1031 exchanges.

  1. Simultaneous Exchange

This means the transfer of the old property and the acquisition of the new property happen simultaneously.This can happen through a little swapping of properties, or a structured transaction involving the seller of the new property, facilitated by a qualified intermediary. While this is the simplest type of exchange, in theory, arranging  these transactions can be quite complicated.

  1. Delayed Exchange

In a delayed exchange, you can sell the original property (with the funds going to a qualified intermediary) and purchase the new property later, following the 45/180-day rules outlined above. Because this allows for more flexibility, it is the most common type of 1031 exchange.

  1. Reverse Exchange

In this type of exchange, you can acquire the new property before selling the original property. This has some benefits, such as taking advantage of a good purchase price and allowing you 180 days to see if the market value of your old property increases, however, these transactions typically have to be done in cash.

  1. Construction or Improvement Exchange

This allows you to sell the original property, transfer the new property to a qualified intermediary, use the proceeds from the sale to make improvements to the new property within 180 days, and then have the property finally transferred to you. This can be a very beneficial arrangement but also a complicated one.

Discuss Your 1031 Exchange with an Attorney

Depending on your situation, 1031 exchanges provide significant tax benefits that you don’t want to miss out on. However, they can also be quite complex and, if done improperly, result in a tax bill you may not be ready to pay. For this reason, it is recommended to plan the transaction in advance with the help of a legal professional.

Our real estate attorneys are familiar with all the requirements of a 1031 exchange and have the experience necessary to carry them out successfully. We can help you quickly formulate a plan that meets your financial goals and minimizes your overall tax burden.

Contact our office to schedule an appointment.

Partition Actions in California

Posted on July 10, 2023 by - Commercial Real Estate

Property ownership in California can be quite a lucrative investment. However, when a property has more than one owner, it is not unusual for conflict between parties or for their interests to diverge. A partition action may be the only remedy when that is the case.

What Is a Partition Action?

A partition action is a legal process in which a joint owner of real property forces the division of the property to sell it. It is based on the legal principle that someone who owns property has an absolute right to sell it. For this reason, once a partition action is begun, the other parties can’t stop the petitioner from dividing the property (unless they waived their rights in writing); they can only fight over the details of how it will be done.

They are common when multiple parties inherit a single piece of property or when multiple parties invest in real estate but cannot agree over its management.

Types of Partition Actions

There are 3 basic types of partition actions in California.

1. Partition by Sale

This is by far the most common type of partition in which the court will force the sale of the property and distribute the proceeds accordingly among co-owners who are tenants in common. 

Imagine three siblings inherit a house from their parents; most people are not interested in having a 1/3 interest in a house where they don’t live, and even fewer people are interested in buying such an interest. The most reasonable solution is typically to just sell the house.

2. Partition by Appraisal

Partition by appraisal is an alternative to partition by sale. In our inherited-house example above, imagine one of the siblings wishes to keep the house. One or both of the other siblings can seek a partition by appraisal in which the one who wants to keep the house buys out the interests of the others. This can only be done with the consent of all parties.

3. Partition in Kind

Partition in kind means the party is physically divided among the co-owners. In theory, this is the default form of partition under the law, but it often doesn’t apply. After all, you can’t physically divide a single-family house between three people. It is more appropriate when large pieces of land, such as farmland, can reasonably be divided into parcels. This tends to be a lengthy and complicated process.

Avoiding a Partition Action

Partitions can be long and expensive, so the best remedy is to prevent them from happening in the first place. 

When multiple parties choose to purchase real property together, they often assume they will always agree on important issues. That is rarely the case in practice and they should do their best to anticipate future disputes. For example, is each party free to sell their interest to whomever they wish, or must the other co-owners approve the sale? Or, more basically, what is the exact nature of each person’s interest in the property?

Regarding inherited property, the co-owners are often thrown into the situation with no advance notice. Creating a clear estate plan that guides how property should be divided can be very helpful.

Talk to an Attorney About Partitioning 

Whether you are considering filing a partition action or have been served with notice of a partition by another co-owner, you should meet with an attorney before proceeding. A clear understanding of property law is necessary to ensure the partition is done properly and your interests are fully protected.

Our legal team has plenty of experience in this area and can help you resolve your dispute out of court or represent you in the partition action itself. Contact our office to discuss your situation and create a plan for moving forward.

How to Set Up a Trust

Posted on June 23, 2023 by - Estate Planning

How to set up a trust

A trust is one of the most effective tools for creating a successful financial plan. They can reduce the overall tax burden, provide for your loved ones, and give you some control to ensure your wishes are carried out after you’re gone. However, trusts are also complicated legal arrangements that can be confusing, leaving some people wondering where to start.

Here we’ll review the basics and best practices of setting up a trust. We should say at the outset that we do not recommend attempting to create a trust on your own and strongly advise you to consult with an attorney to ensure your trust meets all legal requirements.

Trust Basics

A trust is a legal arrangement whereby one person holds property for the benefit of another. What does that mean? It’s easier to understand by thinking of the three principal parties to a trust: the settlor, the trustee, and the beneficiary.

The settlor (also called a grantor or trustor) is the person who creates the trust. They provide the property which will fund the trust, decide who will benefit from the arrangement, and define the rules by which the trust operates.

The beneficiary is the person who benefits from the arrangement. Put another way, the beneficiary is the person (or persons) whom the settlor wishes to help by creating the trust.

The trustee is the person who is responsible for managing the trust property and ensuring the terms of the trust are carried out.

Here’s an example: A single parent who owns an apartment building has a will that states that if they die before their child reaches age 25, the title to the apartment building will be transferred to a trust to be managed by their attorney. Any income generated by the building will be used to pay for the child’s care until they are 18, and then the child will receive monthly cash payments from the income until they are 25, at which point they take full ownership of the building. In the meantime, the attorney is responsible for maintaining the building, paying property taxes, etc., and is entitled to compensation for their efforts. In this scenario, the parent is the settlor, the child is the beneficiary, and the attorney is the trustee.

Setting Up the Trust

If you’re interested in creating a trust, follow these basic steps.

1. Define Your Goals

Trusts are a versatile tool that can be used for many purposes. You may wish to establish a charitable legacy, provide care for family members, or reduce the tax burden on your estate. Knowing your goals will help you make the best decisions for your trust.

2. Identify the Assets You Will Place in the Trust

Knowing your goals, consider the property at your disposal and how it can be used to fund the trust.

3. Identify Your Beneficiaries

Be clear on who you want to benefit from your trust. It can be anyone, from your spouse or children to a charitable foundation.

4. Decide Your Trustee

This is one of the most important decisions you’ll make. A trustee can be a family member, an attorney, or even an institution such as a bank. It should be someone you trust, but the trustee should also be someone who can handle financial matters, such as paying taxes and investing money. It is common for the attorney who drafted the trust documents to serve as trustee, but additional safeguards should be in place to ensure the attorney has not abused their position for their own gain.

5. Have an Attorney Draft the Documents

Trusts shouldn’t be handled on a DIY basis, as many rules must be followed. If done improperly, the result may be that your wishes are not followed after you pass away. Meet with a lawyer with experience in trusts, tell them what you want, and they should be capable of creating the necessary documents.  

Getting Started

If you know what you want or need help exploring your options for creating a trust, the next step is to meet with an attorney. Our estate-planning experts have years of experience drafting trusts, wills, and other legal instruments that will accomplish your goals and survive legal scrutiny if challenged.

To schedule your initial consultation, contact our office today.

Proposition 13: What Is It and How Can We Help

Posted on June 15, 2023 by - Law

Proposition 13

Proposition 13, or Prop 13 as it’s often called, is one of California’s more famous voter-approved propositions, as it has profoundly affected homeownership and the housing market in the state for over 40 years. Depending on who you ask, it’s been instrumental in keeping older people from losing their homes due to unreasonable tax increases, or it’s kept young people stuck perpetually renting their homes and primarily benefited corporations by slashing their property taxes.

Whether or not you agree with Proposition 13, it’s good to know the facts. Let’s discuss what it is and how having the services of a real estate attorney may help you navigate its intricacies and save you thousands of dollars per year.

What Is Proposition 13?

Prop 13 was an amendment to the California Constitution approved by state voters in 1978. It was meant to address the problem of California’s rapidly increasing home values resulting in massive increases in property taxes that could force people out of their homes. For example, a retired person who had purchased their home 30 years ago for $50,000 could quickly find their home assessed at a value of $300,000, which would cause a 600% spike in property taxes.

The key components of Prop 13 are:

  • Property taxes are capped at 1% of the property’s assessed value
  • While the same person holds the property, the total property tax can only increase at a maximum annual rate of 2%
  • When title to the real estate is transferred to another person, the value is then reassessed

Reassessment typically leads to higher property taxes for the new owner, as real estate prices in the state have traditionally risen at an annual rate far greater than 2%. Suppose the new assessed value is lower than the original assessed value (perhaps due to economic recession). In that case, the property’s value will be reassessed annually until it matches or exceeds the original assessed value. At this point, the normal 2% rules kick in.

Crucially, not all transfers of title will trigger a reassessment. Here are some of the most common scenarios in which a property can be transferred without reassessment.

  • Transfers between spouses
  • Transfers from parent to child
  • Transfers from grandparent to grandchild, if both parents of the grandchild are deceased
  • For people aged 55 or older, replacement of a principal residence of equal or lesser value in the same county or in one of the so-called “accommodating counties,” wherein the assessed value of the former home may be carried over to the new home
  • Transfer upon the owner’s death to a co-owner who has been residing at the property for more than a year before the other owner’s death

Taking Advantage of Proposition 13’s Benefits

Knowing how Prop 13 works and how to take full advantage of it can lead to significant tax savings. This is mainly accomplished by transferring the title in such a way as to avoid reassessment because, in case it wasn’t already clear, reassessment is seldom good. For example, a home with an assessed value of $150,000 could easily be reassessed at $500,000, with property taxes jumping from $1,500 to $5,000.

If you are planning on selling or gifting your home to a family member, domestic partner, or someone similar, it is a good idea to consult with an attorney to make sure that transfer is done in such a way as to avoid reassessment. Talking to one of our experienced real estate experts can save you or your loved ones thousands of dollars in unnecessary tax bills. To schedule a consultation, contact our office today.