OBAMA’S MYRA RETIREMENT ACCOUNTS – UN-REALISTIC CAPS AND ZERO INVESTMENT OPTIONS

by | Feb 4, 2014 | Uncategorized

In President Obama’s recent State of the Union Speech he proposed a new method to save for retirement called a MYRA. The MYRA, will work like a Roth IRA as contributions are from after tax dollars and withdrawals will be tax free. Or, will they? Like the President’s last proposal (you can keep your health insurance plan if you like it, you can keep your doctor), the devil is in the details. The myRA will be available to workers of businesses whose employers does not offer a 401(k) or other employer based retirement plan. Under the myRA, and upon voluntary cooperation from the employer, an employee can have contributions to their own myRA made directly from their payroll contributions. The minimum amount to start an account is $25 and the minimum payroll contribution amount can be as little as $5. While the details have not been discussed, presumably the maximum amount that may be contributed per year is the same as Roth IRAs ($5,500, under 50, $6,500, 50 or older). The myRA will be a government account managed by a private third party company. The accounts entire balance will be invested automatically, and without choice by the myRA account owner, into U.S. Treasury Securities. These securities earn about 2.5% a year. The government promises that no fees will be associated with these accounts. Additionally, there is an account maximum such that once an account reaches $15,000, it must be rolled over to a private Roth IRA account. In other words, the myRA is only good for $15,000. A myRA is by no means a retirement account you will retire on but rather a starter account that gets you into another retirement account (e.g., Roth IRA). What is very unclear in the current pronouncements is how myRA account owner’s can access these funds before retirement (again, presumably 59 ½). While the President and Treasury Secretary Jack Lew have stated that a myRA can be rolled over to a Roth IRA, they have made contradictory comments about worker’s access to the funds in a myRA. The President stated that funds may be accessible by a worker before retirement in an emergency while Secretary Lew stated that contributions invested into a myRA can be withdrawn at any time. As many Roth IRA owners know, withdrawls of Roth IRA contributions (not earnings) can occur at any time without penalty. So, how will this rule apply to a myRA. What is President Obama talking about when he says withdrawals can occur if there is an emergency? Well, needless to say, additional rules will be provided by the Tresuary Department as the President has tasked them with creating the rules for myRA accounts. Bottom line, these accounts offer no investment options outside of one government security and can only be used up to $15,000. While it will be a tool used for some, most other worker’s are waiting for a real solution that increases contribution amounts in existing plans being offered (401(k)s, IRAs, Roth IRAs, SEPs, etc.) while offering unfettered investment options. The myRA fails on both fronts.

Why You Need a Living Will? Ripped From the Headlines: THE MUNOZ CASE

by | Jan 28, 2014 | Uncategorized

The recent case of Marlise Munoz reminds us all of one important decision we should not leave to others: Whether we want to remain on life support or not. A living will is a legal document that can be used to make  decisions as to whether we want to be on life sustaining support or whether we want to “pull the plug” if we are brain dead and in a vegetative state.

In November, Marlise Munoz suffered a pulmonary embolism and was taken to a hospital in her town of Fort Worth. She was pronounced brain dead two days later. Marlise was 14 weeks pregnant and under Texas law, her body was required to be left on life support even though the fetus was not able to survive.

Erick Munoz, Marlise’s husband, attempted to have her life support and ventilation removed after being told she was brain dead and after being with his wife’s body in the hospital. He stated she had previously expressed to him that she would not want to be kept on life support if she was in a vegetative state. However, Mrs. Munoz did not complete a living will.

Mr. Munoz stated to the Court that it was difficult to “endure the pain of watching my wife’s dead body be treated as if she were still alive.”

He further stated that, “As a married man, I became very familiar with the way Marlise’s body felt, the way her hair smelled and the way her eyes appeared when we looked at each other, among other things. Over these past two months, nothing about my wife indicates she is alive. When I bend down to kiss her forehead, her usual scent is gone. Finally, one of the most painful parts of watching my wife’s deceased body lie trapped in a hospital bed each day is the soulless look in her eyes. Her eyes, once full of the ‘glimmer of life,’ are empty and dead.”

Despite Mr. Munoz’s requests to the hospital that his wife be removed from life sustaining support, the hospital refused and Mr. Munoz was forced to file an action in Court to have the ventilation and feeding tube removed. Almost two months later, the Court in Texas finally approved the removal of life support and Mr. Munoz is finally able to lay his wife’s body to rest.

Dealing with the death of a spouse or other close family member is one of the most difficult situations a person will face. However, that experience is compounded and made even more difficult when family members are put into situations where they must make life ending decisions for their loved ones. A well drafted estate plan includes a living will (aka, health care directive) whereby a person makes a legal decision for themselves about whether they want to be on  life sustaining support or whether they want to be removed if they are brain dead and in a vegetative state. The living will can be used and relied on by family members and also allows a person to declare whether they want to be an organ donor and whether they want their body to be used for medical research or not. Hospitals are authorized and protected by law when they rely on a living will and it makes family decisions at a hospital so much easier.

Contingency Clauses in Real Estate Purchase Contracts

by | Jan 21, 2014 | Uncategorized

Contingency clauses are some of the most important components of a real estate purchase contract, and can provide significant protections to buyers of real estate. A contingency clause typically states that a buyer’s offer to buy property is contingent upon certain things. For example, the contingency clause may state, “The buyer’s obligation to purchase the real property is contingent upon the property appraising for a price at or above the contract purchase price.” Under this contingency, the buyer is relieved from the obligation to buy the property if the buyer obtains an appraisal that falls below the purchase price. Because contingency cPhoto of a signpost with different directions with the text "Contingency Clauses in Real Estate Purchase Contracts."lauses provide the buyer a way to back-out of a contract they can be excellent tools for real estate investors who make numerous offers on properties.

Contingency Clause Examples

Here are some contingency clauses to consider in your real estate purchase contract.

1. Financing Contingency. A financing contingency clause states something like, “Buyer’s obligation to purchase the property is contingent upon Buyer obtaining financing to purchase the property on terms acceptable to Buyer in Buyer’s sole opinion.” Some financing contingency clauses are not well drafted and will provide clauses that say simply, “Buyer’s obligation to purchase the property is contingent upon the Buyer obtaining financing.” A clause such as this can cause problems as the Buyer may obtain financing under a high rate and thus may decide not purchase the  property. However, because the contingency only specified whether financing is obtained or not (and not whether the terms are acceptable to buyer), the clause can be unhelpful to a buyer deciding not to purchase the property. Some financing clauses are more specific and, for example, will say that the financing to be obtained must be at a rate of at most 7% on a 30 year term and that if the buyer does not obtain financing at a rate of 7% or lower then the buyer may exercise the contingency and back out of the contract.

2. Inspection Contingency. An inspection contingency clause states something like, “Buyer’s obligation to purchase is contingent upon Buyer’s inspection and approval of the condition of the property.” Another variation states that the Buyer may hire a home inspector to inspect the property and that the Seller must fix any issues found by the inspector and if the Seller does not fix the items specified by the inspector then the Buyer may cancel the contract. Inspection clauses are very important as they ensure that the Buyer is obtaining a valuable asset and not a money pit full of defects and repair issues.

Other important contingency clauses are clear and marketable title clauses, approval of seller disclosure documents, and rental history due diligence information (e.g., rent rolls, lease copies, financials, etc.).

Contingency Clause Issues

When using contingency clauses buyers should pay attention to a few key terms. I’ve personally seen many disputes arise as a result of one of the following issues.

1. What Happens to the Earnest Money. One important consideration that is often vague in real estate purchase contracts is what happens to the buyer’s earnest money when the buyer exercises a contingency. Does the buyer receive a full return of the earnest money? Does the seller keep the earnest money? If the contract is silent and if you as the buyer exercise a contingency, don’t count on the seller agreeing to a release of the earnest money as they are often upset that you are not going to purchase the property. Make sure the contract clearly states something like the following, “If Buyer exercises any contingency, Buyer shall receive a full return of any earnest money deposit or payment to Seller.”

2. Contingency Deadlines. Another important contingency clause issue is the date of the contingency clause deadline.  Most contingency clauses have expiration dates that occur well before closing. Those dates should typically be somewhere from 2 weeks to 2 months from the date of the contract, depending on the purchase and seller disclosure items and the type of property being purchased. For example, single family homes will typically have a shorter window as financing and inspection can occur more quickly than would occur under a contract to purchase an apartment building. Whatever the deadline is, make sure that the deadline is set far enough out so that you can complete your contingency tasks. You need to make sure you have enough time to obtain adequate financing commitments, to properly inspect the property, and that you have enough time to review the seller’s disclosure documents. Setting a two week deadline is sometimes done but two weeks is usually not enough time to complete financing commitments, inspection, and due diligence activities that are necessary to determine whether you are going to commit to purchasing the property. If contingency deadlines are approaching and you need more time, then ask the seller for an extension before the deadline arrives. If the Seller refuses an extension, then exercise the contingency you need more time to satisfy.

3. Exercise You Contingency in Writing. If you do exercise a contingency and decide to back-out of the purchase of the property, make sure you do it in writing. Don’t rely on telephone calls or even e-mails (unless the contract permits e-mails as notice). Additionally, make sure that the reason for the contingency and that the date of the contingency are put in writing and are sent to the seller in a method where the date can be tracked in accordance to the notice provisions of the contract. For example, if the contract requires a contingency to be noticed by fax or hand delivery, don’t rely on an e-mail to the seller or the seller’s agent as such communication will not invoke the contingency.

Once the deadline to exercise a contingency has passed, the buyer is obligated to purchase the real property and may be sued for specific performance (meaning they can be forced to buy) or at the least the buyer will lose their entire earnest money deposit. Contingency clauses are the best defense mechanism to a bad deal and should always be used by real estate buyers. Keep in mind that until you close on the property, the only investment you have is a contract and if you have a bad contract, then you have a bad deal.

How to Document and Write Down a Failed IRA Investment

by | Jan 7, 2014 | Uncategorized

While every self directed IRA investor enters into investments with high hopes and expectations of large gains, sometimes an IRA has to declare a loss on its investments and sometimes those losses are total losses. However, how does an IRA document a loss on a private partnership investment or an uncollectible promissory note investment? Two Tax Court opinions released today show us what not to do. Berks v. Commissioner, T.C. Summary Opinion 2014-2, Gist v. Commissioner, T.C. Summary Opinion 2014-1.

Berks v. Commissioner and Gist v. Commissioner

In Berks and Gist, self directed IRA owners invested their IRAs into various real estate partnerships and had equity interests and promissory note interests. Approximately five years after the investments were made, the IRA owners sought to declare the values on all of the investments worthless as the partnerships were no longer in business and as the IRA owner was told by their friend who they invested with that the investments were worthless. The IRA custodian for Berks and Gist sought additional documentation before agreeing to write down the value of the investments. Writing down the value of an investment and closing an account is a red flag for the custodian and the IRS as both want to ensure that IRA owners are not unfairly writing down investments in an effort to avoid taking distributions from the IRA which are taxable. As a result, the IRA custodian sought documentation as to the valuation change and upon receiving no documentation; the IRA custodian distributed the account to the IRA owners with the original investment amounts made from the account.

The self directed IRA accounts were closed by the custodian and the IRA owners were responsible for the taxes due from the 1099-R as well as accuracy related penalties. Eventually the un-claimed 1099-R went into collections with the IRS and the IRS sought payment of the additional taxes owed. The taxpayers disputed the amounts owed and took the case to Tax Court. The case eventually proceeded to trial and the taxpayers both lost in separate cases because they went into the case with no documentation or evidence of collection attempts. Instead, there was only testimony from the IRA owner and from their advisor that assist them in the investments. In Berks, the Court stated, “…[the IRA owner] simply took Mr. Blazer [their friend they invested with] at his word, and they apparently never saw the need to request any documentation that would substantiate that the partnerships had failed or that the promissory notes in the IRA accounts had become worthless.” Accordingly, the Court ruled against the IRA owners and held that the investment values as reported by the custodian (the initial investment amounts) were the best representation of fair market value. As a result, the IRA owners were subject to taxes owed on the higher valuation amounts.

I handled a very similar case to this one in Tax Court myself. In my case, the case resulted in the IRS reducing the valuation of the distributed IRA down to the proper discounted fair market valuation the IRA owner was seeking. As a contrast to what the taxpayers did to document their losses in Berks and Gist (e.g., no documents or records), I have outlined the steps that should be taken to properly document a loss with your IRA custodian and/or with the IRS/Tax Court.

Documenting a Loss/Failed Investment

  1. Hire a Third Party to Prepare an Opinion as to Value. Your custodian, the IRS, and the Tax Court all want to see an independent person’s opinion as to the value of an investment.
  2. Provide Accounting Records Showing Losses and No Profits/Income. In my Tax Court case on the same issue (obviously different facts and investments), we were able to re-construct the accounting records and losses from the company that demonstrated the significant valuation change. These accounting records we assembled were accompanied by financial records and third party documents which supported our numbers. The IRS agreed with our decreased valuation before trial, and dismissed their case against our client.
  3. Document Fraud. If fraud was involved by persons receiving the income. Was a lawsuit filed? Were complaints made to regulatory bodies (e.g. SEC or state divisions of securities)? Provide those documents to your custodian.
  4. If the Investment Losses are from a Un-Collectible Promissory Note.
    1. Engage a lawyer or collection agency to make collection efforts. Keeps documents of their collection efforts.
    2. If the borrower filed bankruptcy, provide the bankruptcy documentation.
    3.  If the loan is totally un-collectible, Issue a 1099-C (Forgiveness of Debt Income to the Defaulted Borrower, you’ll need the borrower’s SSN/EIN for this).

The best way to document an investment loss is to provide a third party valuation to your custodian.  A custodian cannot accept an e-mail or letter from the IRA owner saying the investments didn’t pan out. If a third party opinion as to value cannot be produced, you’ll need to provide some of the records and documents I outlined above to demonstrate the loss. Remember, as Tom Cruise said in A Few Good Men, “It doesn’t matter what happened. It only matters what I can prove.” To prove an investment loss in your IRA, you’ll need documents and records showing what went wrong.

SELF DIRECTED IRA INVESTMENTS & CROWDFUNDING: WHAT EVERY INVESTOR SHOULD KNOW

by | Dec 17, 2013 | Uncategorized

Crowdfunding will soon become one of the most utilized methods of raising capital for small businesses, investment ventures, and start-ups. The concept of Crowdfunding is to loosen the restrictive securities laws so that new or existing companies can raise small sums of money from large groups of people. If you’re unfamiliar with Crowdfunding, check out my prior blog article on the subject here. http://72.52.171.134/~newsdirahandbook/sec-finally-releases-new-crowdfunding-regulations/

Self directed IRA investors will likely be a significant investor group in Crowdfunding offerings as much of the nation’s wealth (and available investment capital) is held in IRAs. Before deciding to invest your IRA into a Crowdfunding offering, self directed IRA investors should consider the following issues and factors.

  1. Will Your IRA Have to Pay UBIT Tax? Many Crowdfunding offerings will generate UBIT tax for the IRA owners of the company. UBIT tax applies to income received by an IRA that is not passive. IRC 511, IRS Publication 598. For example, if my IRA invests into a new tech start-up LLC, then the profits received by the IRA will likely be subject to UBIT tax since the tech company LLC is not a passive business. Also, if my IRA invests into a Crowfuding company that flips real estate the profits my IRA receives will also likely be subject to UBIT tax.Passive income received by an IRA, on the other and, is exempt from UBIT tax. IRC 512. If the Crowdfunding Company is a c-corporation, then there is no UBIT tax as c-corporation dividends to an IRA are exempt from UBIT tax.  Also, rental real estate income, royalty income, and interest income are exempt from UBIT tax.a
  2. An IRA Cannot Buy S-Corporation Shares. An IRA cannot buy stock in an s-corporation as an IRA does not qualify as an s-corporation shareholder. As a result, you cannot use your IRA to invest in an offering of s-corporation shares.
  3. Are You or Your Family Members Involved in the Crowdfunding Company? If you or your family members are owners or part of management in the company raising funds, then it may be a prohibited transaction for your IRA to invest into the Crowdfunding offering. The prohibited transaction rules apply to all IRA investments and essentially create restrictions on investments into companies where the IRA owner or family members of the IRA owner are involved. IRC 4975.
  4. Have Crowdfunding Rules Been Complied With? A Crowdfunding offering must include certain disclosure documents and financial records to prospective investors. Also, the transaction must be conducted through an SEC registered Funding Portal who serves as an escrow/transaction agent for the offering. And lastly, the Crowdfuding rules restrict how much someone may invest from all sources of their funds (personal and IRA). The amount that may be invested annually ranges from $2,000 to $100,000 per person and depends on the IRA owner’s annual income and/or Net Worth. This is an annual collective number for all Crowdfunding offerings and the IRA owner’s personal investments and their IRA investments are combined to reach the maximum limits.
  5. When Do You Need To Take Distributions? Most Crowdfunding offerings will restrict the investors from selling their interest for a certain period of time. Consequently, IRA investors in a Crowdfunding offerings need to plan for the long haul and should not invest into a Crowdfunding offering if they are planning or are required to take distributions from the sums being invested.
  6. Adequate Due Diligence. And last, but certainly not least, have you conducted adequate due diligence on the Crowdfunding offering? Do you understand how the company makes money (or plans to)? What are their operating expenses? What is the experience of the persons running the company? Do you understand the industry the company is in? Do the documents you received match up with what you have been told that peaked your interest in the offering?  I have previously prepared a due diligence top ten list that you can refer to here if you don’t know where to start. http://72.52.171.134/~newsdirahandbook/performing-due-diligence-before-you-invest-the-due-diligence-top-10-list/

Crowdfunding will become a significant investment option for self directed IRA owners. As a result, self directed IRA owners need to properly analyze the investment options for their IRA prior to executing investments.

TO DISSOLVE MY COMPANY OR NOT TO DISSOLVE

by | Dec 10, 2013 | Uncategorized

The end of the year is an excellent time to consider whether you should dissolve an unused business entity. Perhaps you have an LLC that once owned a rental property or an s-corporation that once operated a business. If there are no longer operations or assets in your entity and there is no intention to place new business or assets in the entity, then you should consider dissolving your entity.

Dissolution is the legal method of closing an entity and its registration with the state. Following dissolution, the entity is no longer active with the state and you cannot operate a business in the company name. There are a number of reasons to dissolve an inactive entity. First, dissolution will end annual on-going fees that are charged by the state (I’m talking to you California clients). Second, dissolution and the filing of a final tax return (where applicable) for the company will end on-gong tax return reporting. This is of particular benefit to corporations and partnership LLCs as they are all required to file annual tax returns. If the company ends up being dissolved after January 1st then you may end up being required to file a 2014 tax return for the company and may also be subject to 2014 state fees.

If a claim or lawsuit is later filed against the dissolved entity, the corporate veil will still be available to protect the business owner’s personal assets from the business so long as the liability arose when the entity was in good standing. As a result, owners of a dissolved a entity still receive liability protection from the company for liabilities that occurred when the entity was active and registered.

A proper dissolution requires a filing with the state of organization/incorporation as well as the drafting or company minutes documenting the dissolution and wind down of the company. Remember, you will also want to inform you accountant as to the dissolution to insure that a final tax return is filed. Contact the law firm at 435-586-9366 if you are need of a dissolution by year end.

By: Mat Sorensen