$100 million Starbucks verdict shows danger of ‘tip pools’

A recent $100 million verdict against Starbucks for the way it required employees to participate in “tip pools” should jolt employers with all the force of a Venti extra-shot Caramel Macchiato.

Tip-pool lawsuits have been filed recently not only against restaurants, but also against hotels, transportation companies, delivery services, casinos and sports facilities.

Recently, many companies have been tempted to expand the number of employees who participate in tip pools. This can seem like a good way to save money, because the employer gets a tip credit against the minimum-wage requirements. [Read more…]

Meet the typical homebuyer

The typical homebuyer today is 39 years old, has a household income of $74,000, searches for eight weeks, sees 10 homes, and makes a down payment of 9%, according to research conducted by Bankrate.com. Married couples constitute 62% of homebuyers, with single women accounting for 20%, single men 9% and unmarried couples 7%. (The remaining 2% of buyers were classified as “other.”) Perhaps surprisingly, only 40% of homebuyers have children under 18 living at home. Some 36% of purchasers pay the asking price or more. Only 28% of purchasers pay less than 95% of the asking price.

Why it’s not always smart to put your house in your child’s name

Some people decide to do some “homemade” estate planning and put their house in a child’s name. They figure this will avoid probate and get the house out of their estate for tax purposes. This might be a good idea in some cases. But remember, if you give your house to your child now, any appreciation in the value of the house between now and the time it’s eventually sold will be a capital gain for your child. And if your child doesn’t live in the house as a principal residence for two of the five years prior to the sale, he or she will owe capital gains tax on this increase in value. (And this is just one of the things that can go wrong.) Estate planning is a very complicated field and it’s easy to make a mistake if you try to do it yourself. Tell us your concerns, and we’ll be happy to point you in the right direction.

Down market prompts new types of sales for buyers

The down market in real estate has created a boomlet in two obscure types of property sales: the “short sale” and the “house swap.” A short sale is an alternative to foreclosure. If a property owner is unable to make mortgage payments, but the lender doesn’t want to go through the legal hassle of foreclosure, the owner and the lender may agree to a short sale. The property is sold, and if the sale price is less than the balance on the mortgage, the lender writes off the difference.

For lenders, this can be a good deal not only because the cost of foreclosure proceedings is high, but because owners of property in foreclosure often stop caring for the property, resulting in maintenance problems that lower its value. [Read more…]

Be careful when selling or leasing mineral rights

Congratulations – there’s oil, coal, gas, salt, gemstones, or some other valuable material under your property. But how exactly do you sell someone the right to develop it? Most sales of real estate are sales “in fee simple” – which means the buyer owns the surface of the land, the earth underneath it, and the air space above it. But it’s possible to split up these rights. In particular, it’s possible to sell the earth underneath the property, and the right to extract minerals from it, while retaining control over the surface.

This often happens. A property owner will sell to a mining company the right to dig far under the surface. Often this seems like “found money” to the owner, who has no great concern about what happens a mile below the property. [Read more…]

Second owner of building could sue builder for defects

The second owner of a building could sue the builder for construction defects that led to the development of mold, the Iowa Supreme Court has ruled. The case involved a home that was built in 1995. In 2000, the original owners sold it to another family. The second family then discovered water damage and mold. They claimed the mold was the builder’s fault, but that the defects that caused the mold were hidden and couldn’t have been discovered until after their purchase.

This is a question that has divided courts across the country. The first owner of a building can often sue the builder for defects, because the first owner and the builder typically have a contract or a business relationship. But the second owner of a building doesn’t usually have any relationship with the builder. Nevertheless, the Iowa court said that second owners could sue (and presumably third and fourth owners, etc.). [Read more…]

Can a condominium ban smoking inside units?

There’s a growing trend among condominium owners to ban smoking – not just in common areas, but inside individual units and in outdoor areas as well. Bans on smoking in common areas have been around for years. But a ban on smoking in individual units is a relatively new idea – and there are many questions about its legality.

Recently, an upscale 118-unit condo in Minneapolis banned all smoking within the building as well as on private balconies. The town of Belmont, California adopted an ordinance prohibiting smoking in all condo units in the city. A new Utah law permits condo associations to ban smoking, and the attorney general of Hawaii recently issued an opinion that such a ban would be allowed under both state and federal law. However, there have been almost no court cases involving these bans, so we don’t really know yet whether they’ll hold up if they’re challenged. [Read more…]

‘Family LLC’ saves a family $14million

A family-owned limited liability company saved a family $14 million in taxes, in the latest ruling from the U.S Tax Court on this technique. 

With a family LLC, parents create a company and fund it with valuable assets.  Then they give their children ownership interests in the LLC.  Giving these interests triggers less gift tax than giving the underlying assets, because they are “worth” less on the open market.  That’s because outside investors would be reluctant to buy a share of a family business that they couldn’t control.  [Read more…]

Do you want your trust to benefit your heirs’ surviving spouses?

An heir to the Johnson & Johnson fortune created a trust to benefit four children.  The trust was set up so that it would provide money to charity for a period of years, then be distributed to the four children and their spouses.

By the time the distribution came around, one of the children (named Mary) had died.  Her third husband, Martin, who was married to her when she died, claimed that he was a “spouse” who was entitled to collect from the trust. [Read more…]

Loan to family business could trigger higher estate tax

From 1997 to 2003, a family could take an estate tax deduction of up to $675,000 if more than half of the estate property consisted of interest in a family business.  This law is scheduled to go back into effect in 2010, so it’s wise to be aware of it.

In particular, you should be aware that certain business decisions you make now- such as making personal loans to your company as opposed to capital contributions – could determine whether your heirs can claim the deduction.

A recent case involved the Farnam family, who owned a chain of auto-parts store in Minnesota, North Dakota and South Dakota.  To help grow the company, the family members made a number of loans to the business. [Read more…]

Children who inherit a 401 (k) can roll it over into a Roth IRA

The IRS has given families a little more flexibility in handling a 401 (K) and pension plans.  According to an IRS announcement, children who inherit a 401 (k) or pension plan can now roll it over directly into a Roth IRA.

Before, a spouse who inherited a 401 (k) or pension plan could roll it over into a Roth IRA, but this was not true for a beneficiary other than a spouse, such as a child.  But now its true for any beneficiary. 

(In the past, a non-spouse beneficiary could roll over an inherited 401(k) or pension plan into a regular IRA, but not a Roth IRA). [Read more…]

Low Interest Rates create golden estate planning opportunity

The recent dip in interest rates has created a golden opportunity to save taxes while giving income-producing assets to your heirs.  You can do this with a “grantor retained annuity trust,” or GRAT.  It allows you to continue receiving income from the property for a number of years, and you can then give it to your heirs while dramatically reducing your estate and gift tax.

The amount of taxes you can save is determined by a federal interest rate, known as the “7520 rate.”  The lower the rate, the more you can save.  And that rate is at one of the lowest points its been in many years. 

The donor of a GRAT creates a trust and funds it with income-producing assets.  The donor then keeps the right to receive a certain amount of income from the trust each year.  Generally, the donor gets the same amount each year, but the amount can vary within certain limits.  [Read more…]