Pennsylvania Trusts and Estates Blog

Did you "stop renting a room" and "buy the hotel"? Many folks have purchased timeshares - which are a form of ownership or a right to the use of property - often of resort properties. Multiple parties own a single unit, and each person is allotted a period of time, for example, one week, in which they may use the property.

There are two basic types of timeshares: (1) the owner of the unit actually owns a piece of the real estate and (2) the owner of the unit has a lease or right to use the unit for the specified time.

If you own a unit of a condominium for a week, then you own real estate. A condo is an interest In real estate, part of the whole parcel of real estate. If you own a unit in a co-operative apartment for a week, you don't own real estate. The building that is a co-op is owned by a Co-operative Housing Association which is a corporation. Owners of co-op units own shares in the corporation with a right to occupy a particular unit. Since the ownership interest is corporate stock, co-op owners to not own real estate - they own personalty. Most timeshares are condominiums since co-ops have caught on in only a few markets, most notably New York City.

As with other real estate and personalty, timeshares can be resold to another party, transferred as gifts, or inherited by beneficiaries. Beware - in some cases the lease-type timeshare cannot be transferred to your heirs.

What happens to your timeshare when you pass away? Like any other property, if there is a joint owner it passes to the surviving joint owner. If you are the only owner, it passes under your will to your beneficiaries or if you have no will, under the intestacy statute to your heirs.

If your timeshare is in another state or country - you could be leaving quite a problem for your family. If the timeshare interest is real estate because it is part of a condominium, its transfer and inheritance is governed by the laws of the state or country where it is located. That means that your executor will have to arrange for an ancillary probate in the state (or states) or country (or countries) where you own timeshares. That, in turn, means expense. The executor will need an attorney in the ancillary state as well as in the domiciliary state. There will be costs and filing fees.

Probate is a legal process by which title to property is formally transferred at death. A primary probate proceeding is opened in the state where the deceased is domiciled at time of death. Ancillary probate is a probate proceeding opened in another state to transfer property owned by the deceased in that state. Real estate, including a timeshare interest, if located in a non-domiciliary state (or another country) must be transferred via an ancillary probate proceeding in that jurisdiction(s). The cost of a single ancillary probate proceeding can be thousands of dollars just to transfer a single timeshare week.

Beneficiaries who are faced with this dilemma sometimes choose not to go the route of ancillary probate and just abandoned the timeshare. In general, timeshares are hard to sell unless they are the cream of the crop. The beneficiary has no obligation to deal with the timeshare - they don't own it until there is an ancillary probate. If a beneficiary truly doesn't want the time share, he or she may be better off skipping the cost of ancillary probate rather than being saddled its costs and the maintenance fee on a timeshare that he doesn't want and can't sell.

If you have a timeshare, do some estate planning and save your beneficiaries from these headaches. If you have a revocable living trust, change the title to your timeshare from your name to the name of your trust as owner. The trustees become the owner, and no probate is required on your death.

If you don't have a trust, it is probably not worth getting one only because you have a timeshare. In that case, consider adding beneficiaries as joint owners so that, on your death, the timeshare passes to the beneficiaries by operation of law, and no ancillary probate is necessary.

In some states (Pennsylvania is not one of them) you can have a beneficiary deed. A beneficiary deed is one in which you can name the next owner in the deed, the same way you do with a life insurance policy or a "pay on death" savings bond or bank account. If the ancillary state permits beneficiary deeds, you could change the title to your timeshare unit by keeping it in your name but adding a beneficiary to be the next owner on death. This mechanism also avoids the necessity for an ancillary probate proceeding.

The Worker, Retiree, and Employer Recovery Act of 2008 (the "Act") became law on December 23, 2008. The Act waives 2009 Required Minimum Distributions (RMDs) from Individual Retirement Arrangements (IRAs), 401(k), Profit-Sharing, Money Purchase Pension, 403(b), and certain 457 retirement plans.

The law generally requires taxpayers over age 70 ½ to take a Required Minimum Distribution (RMD) from their IRA or other defined contribution plan every year. The RMD for each year is determined by dividing the retirement account balance as of the end of the prior year by a factor found in an IRS life expectancy table.

The Act gives a special waiver for 2009 only. No RMD need be withdrawn in 2009. The tax policy concern was that with the drop in the financial markets over the last year or more, the market value of these plans was already drastically reduced. Congress wanted to give taxpayers a break by letting them skip the 2009 withdrawal.

The Act's suspension of RMDs for 2009 will help retired taxpayers who do not need to rely on their RMDs for living expenses. By skipping the 2009 RMD, they will have less taxable income for 2009, and, possibly, avoid adjusted gross income (AGI) based phase-outs of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries. Older recipients will benefit the most, because the shorter the life expectancy, the larger the percentage of required RMD payout.

The 2009 waiver of the RMD provides no benefit at all to those taxpayers who must make regular withdrawals from their retirement plan accounts and IRAs in order to get by each month. The amount withdrawn in 2009 will still be taxable income.

If you inherited an IRA from a decedent who died in 2008, be careful. If the IRA account owner named multiple beneficiaries, in order for each beneficiary to withdraw over his or her life expectancy, the IRA must be split up into separate inherited IRAs by the end of the year following the owner's death. Because of the waiver, if the IRA owner died in 2008, you don't have to take an RMD in 2009. That might lead you to assume you can put off dealing with the inherited account. Not so. You still must split the IRA up into separate accounts by December 31, 2009. The 2009 RMD for each beneficiary of a separate account is waived.

For beneficiaries who are required to take RMDs using the five-year rule, the five-year period under that rule is determined without regard to calendar year 2009. For example, for an IRA owned by an individual who died in 2007, the five-year period ends in 2013, instead of 2012.

If you turned 70 ½ in 2008, you had until April 1, 2009 to take your 2008 RMD. If you waited until 2009 to take your 2008 RMD, then ordinarily, you would also have to take your RMD for 2009 also, making 2 RMD withdrawals in one year. For 2009 only, you can make just one withdrawal, the 2008 RMD that you put off until 2009. That 2008 RMD is not waived by the Act. Only the 2009 RMD is waived.

If you turned 70 ½ in 2009, in the absence of the 2009 RMD waiver, you would have been required to take your first RMD (the 2009 RMD) by April 1, 2010, and then take your 2010 RMD (the second RMD) by December 31, 2010. The Act waives the first RMD (the 2009 RMD) for account owners who turn 70 ½ in 2009. The 2009 RMD waiver does not affect RMDs required for 2010. If you turned 70 ½ in 2009 you are still required to take your second RMD by December 31, 2010.

What happens if you already took your 2009 RMD? Maybe you didn't know about the special waiver for 2009 passed by Congress. You can put the RMD back. There has always been a 60 day rollover period to repay a distribution. For 2009 only, the rollover has been extended to Nov. 30, 2009. If you took a distribution in 2009, you can put back up to the amount of your RMD, or roll it into an IRA, and not pay taxes on the returned money if you can get it back into an IRA within 60 days or November 30, 2009, whichever is later. Rollovers are limited to one a year from each account; this has not changed.

Let's take a boat to Bermuda
Let's take a plane to Saint Paul.
Let's take a kayak to Quincy or Nyack,
Let's get away from it all.
- lyrics by Tom Adair and Matt Dennis

Do you have a house at the shore? A condo in ski country? Time share in Florida? In just how many states do you own real estate?

Every state in which you own real estate will be involved in the settlement of your estate unless you arrange your estate plan to avoid this complication.

Real estate law is state law. Only the courts of a particular state have authority to resolve issues about title and ownership of real property located in that state. If you are a resident of Pennsylvania when you die and own a condo in Florida, settlement of your estate will require a domiciliary probate in your county of residence in Pennsylvania and an "ancillary probate" in Florida. An ancillary probate is required in each state where real property is owned in the name of the decedent.

Not only are there probate proceedings required in the other states, but there can be inheritance and estate tax due to those other states as well. That's a lot of probates, a lot of fees, and a lot of lawyers.

The first thing your estate plan should do is eliminate the need for these probate proceedings in various states. The simplest way to do this is titling real estate in other states in joint names - first with a spouse, and then with intended beneficiaries such as children. This simple device means that the real property will pass to the surviving joint owners on your death, and no probate proceeding is required. Changing the title to include joint owners requires the preparation and recording of a new deed. It may also require the consent of a mortgagee if there is a mortgage on the property. While this is a simple procedure, there are downsides to joint ownership. Any sale, mortgage, lease or other transaction involving the property requires the unanimous consent of all owners and a joint tenant's interest is exposed to claims of his or her creditors.

Another solution is to transfer title of out-of-state real estate to a revocable trust. The title to the shore home is then held by a Trustee, not by the individual. When the individual dies, the trust continues; and there is no need for a probate since the owner did not die (the trust lives on). No title question will arise. This technique has the added benefit of retaining complete control of the property in the hands of the creator of the trust.

Sometimes these properties are transferred to entities like corporations, limited liability companies and partnerships. Again, since the decedent did not hold the title to the real estate, but rather, the entity which has a continuing existence held the real estate, there is no need for an ancillary probate.

Most of these techniques do not remove the property from the taxing jurisdiction of the state where the real estate is located. Your executor can expect to file state death tax returns and perhaps pay tax in these other states.

There is a special federal estate tax planning technique available for residences which can be used for the primary residence and/or a secondary residence. It is a Qualified Personal Residence Trust ("QPRT"). In addition to solving the ancillary probate problem, and possibly addressing the sharing of the residence by the family after Mom and Dad are gone, this technique also offers substantial estate tax savings. A QPRT is an irrevocable trust which provides for the occupancy of the residence by Mom or Dad for a period of years. At the end of the term, Mom and Dad's right of occupancy ends and the beneficiaries become the new owners. When the trust is created, a gift is made; but the value of the gift is steeply discounted - hence the estate tax savings.

What if your get-away place is an island villa in Kokomo, Antigua, or a pied-a-terr in Paris? You'll need to consider the foreign county's probate and estate tax systems in your estate plan. Your attorney will need to work with counsel in the foreign jurisdiction to co-ordinate an estate plan that will include that property too.

The answer seems to be, "of course."

Many of us think that Congress will do something to patch-up the estate tax before January 1, 2010 arrives and its time to "throw Momma from the train." But maybe not. They may wait until well into 2010, maybe even October, or even later, and make the change retroactive to January 1, 2010. Is that constitutional? The answer seems to be "yes."

Blogging credit to Gideon Alper. Read his post entitled "Estate Tax Repeal in 2010 Not a Big Deal Becasue Congress Can Pass Retroactive Tax Amendment."

Here is an excerpt from Gideon Alper's post describing his interview with Professor Jeffrey Pennell:

"Why Not Just Do It Now? Follow the Money.

So if Congress can amend the estate tax now (or at least pass a one year extension), why would it wait until 2010 and apply a tax retroactively? Three reasons, all about money.

The first is that if Congress passes a long term solution to the estate tax, fixing not just 2010 but all future years, it would have to also reinstate an applicable exclusion amount ($3.5 million for 2009). Otherwise everyone would pay the tax. If the exclusion amount remains at $3.5 million, then the extension would be a revenue loser. Under Pay-Go rules, Congress would have to pay for the exclusion, either by cutting funding somewhere else or raising taxes. A long term estate tax means a long term revenue loser. Congress doesn't want that. Better to have a short term revenue loser than a long term one.

The second reason is more cynical. I asked Professor Pennell why he thought Congress might wait till next year and pass a retroactive estate tax. He said because 2010 is an election year. Congress would love to deal with estate tax legislation next year. While almost everyone recognizes that we'll have some sort of estate tax, special interest groups disagree on the applicable rate and applicable exclusion amount. These groups will donate to congress members to encourage them to vote their way. Congress members want these contributions next year when people are up for reelection. Both sides would benefit from delaying legislation.

The third reason is the most cynical at all. As Professor Pennell explained to me, Congress would rather deal with the estate tax frequently than pass a long term solution. Through a series of retroactive amendments and short term extensions, Congress could set itself up to address estate tax legislation every election year. That means that those same special interest groups would, on each of those election years, once again round up contributions in support of their position.

So it's okay if Congress does nothing this year. The estates of people who die in 2010 can still be taxed. In fact, expect to hear about estate tax legislation for years to come."

For extra credit:
Here is the SCOTUS case which holds that a retroactive estate tax change is constitutional: United States v. Carlton (1994).