LegalEase Blog

Be More Generous and Pay Less Tax!

New tax law changes dramatically increase the amount of property one can leave to others before federal estate / gift taxes are due.  Now technically even the most miserly among us gives away 100% of assets at death, but the most generous often plan to give away property during their lifetime. 

Very generally speaking, the IRS requires taxpayers (or their estates) to add up EVERYTHING they gave away during their lifetime and EVERYTHING they gave away at death. For many years this figure hovered under $1 million before rising to around $5 million.  Now, only if that amount exceeds $10 Million (in 2018) will federal estate/gift tax be due. 

Even if tax is not due, a tax return might be.

During one's lifetime there is a requirement to report gifts of over $14,000 or $15,000 (the higher number in 2018) in a tax year to a single recipient.  In other words, you can give someone property worth up to $15,000 (or $30,000 if your spouse joins in the gift) without reporting the gift.  There is an unlimited exception for gifts to one's spouse, but gifts to others (children, siblings, friends, etc.) must be reported if over the annual exclusion.   

Transferring inherited property

Not all that infrequently someone calls needing to transfer property they inherited from a relative.  In some cases, the surviving heir has continued to pay the property tax, insurance and mortgage without formally changing ownership.  So long as all the bills get paid, does it even matter when a deed gets filed? 

Generally speaking, yes.  It is wise to transfer ownership as soon as practical for several reasons.  

First, a non-owner cannot get homestead credit for property being their principal residence.   What this means is that if a son or daughter or whomever inherit property but wait awhile to transfer the deed, they will NOT qualify for the homestead credit in Maryland, nor get the benefit of any associated cap on tax hikes. If the deceased owner was getting a homestead credit, that will NOT continue after their death.  Even if it takes the county/city a few years, once they eventually learn that the record owner dies, they will generally require repayment of the tax credit for all tax periods after the death.   For instance, lets say that Sonny inherited property from his father.  His dad passed away in 2010 but Sonny, who was already living in the property and paying the bills, doesn't get around to filing the deed until 2016.  At this point the county will seek to "recapture" six years worth of tax credits and Sonny will need to repay same.  If instead Sonny filed the deed the same year his father passed away, he would have been able to get this credit in his own name. 

Secondly, when insurance comes up for renewal, a dead person cannot get insurance in their name.  If the PR or relatives don't let the insurance company know, it may continue to send bills in the deceased owner's name and collect premiums… until, that is a catastrophe hits.  Then the heirs run the very real risk that the insurance company will kick back the premiums for any policy issued after the original owner died -- leaving the property potentially uninsured.   Until the new deed is recorded, the person inheriting will not have ownership status and will not be able to get insurance in their own name. 

Finally, estates rarely get easier to administer with the passage of time.  What could be a very simple estate to administer when mom or dad die can be very complicated 5, 10 or more years down the road.  The named Personal Representatives may no longer be available or beneficiaries may have since passed, requiring opening up levels of estates with associated time and cost.  

Bottom line?  If you inherit property, try to open an estate as soon as reasonably practical.  An estate / personal representative deed is not expensive (this firm prepares such deeds for a flat fee) and can generally be drawn up as soon as the time period for creditor claims has passed.   There are some prerequisites - you'll need to have an opened estate and letters of administration in hand before the deed can be prepared.  If an estate has not been opened or the PR needs assistance an experienced lawyer can help with the estate administration as well.  If the PR feels comfortable managing the estate on their own, they may wish to hire an attorney for the sole task of drawing up and recording the deed.

If you are considering planning for your own estate, consider a life estate deed - this will automatically transfer property at the original owner's death, without need for a second deed OR probate proceedings to pass the asset.  

Private Loans

Someone recently contacted me wanting to lend a friend a small sum and get paid back later. They just wanted a quick promissory note describing their terms.   Simple, right?   Well… as mentioned in earlier blogs, Maryland law has a lot of rules for private (non-federal bank) lenders.  Just because the parties agree doesn't mean the loan is legal.  First of all, there are usury laws.  Usury means interest (usually excessive interest) and for the good of the public, the law imposes caps on just how much interest one can charge.   

Ideally, the lender who is not totally self-serving will want to limit interest in any event.  Is it ever fair or reasonable to charge 50%, 100% or even 1000% interest?  (Most would emphatically say "no!" though I've seen pay-day loans from non-US lenders with extraordinary and patently offensive interest rates as high as these.)  

Rather than guess what a fair interest rate might be, Maryland actually has in its constitution a legal rate of interest. 

In Maryland the legal rate of interest is 6%.   Judgments have a legal rate of 10% (simple) interest.  Depending on the situation and status of the lender, other rates (up to 18% or 33%) may not be illegal.  Generally speaking federally chartered banks don't need to follow every state rule.  

But interest is not the only issue with private loans.   There may be restrictions on what the lender can take as collateral.   There may also be restrictions on the number of unlicensed loans someone can make.  There may be required disclosures.   Bottom line, if you're thinking about lending someone else money and making interest on the deal, know the law first! 

My business is forfeited - now what?

A surprising number of small businesses in Maryland may not realize that they must file annual personal property returns.  Maybe they overlook the mailing from the State or think it is redundant so long as they get their income taxes in.  Whatever the reason, filings are overlooked, with serious consequences.  If a business neglects its personal property returns for a long enough time it will eventually find that its charter -- or legal right to do business - is forfeited. 

When the returns are overdue, the State will switch your business status to "not in good standing."  If your business is not in good standing, you can remedy the problem without too much hassle by filing for any past / overdue returns before the charter is forfeited.   

After some point in time, the State Department of Assessments and Taxation will actually forfeit or yank the charter of a business not in good standing.   That is not a good thing as the business no longer has a legal right to do business.  The individuals running the show risk increased liability exposure.  Moreover, it may be criminal to continue to use the forfeited business name.   To get things back up in good standing, one must "revive" or re-instate the entity.  This means filing any overdue returns, paying any tax, getting clearance from a government office and  once that is accomplished, filing Articles of Revival (with associated filing fee).   If a business has waited several years, it may find this process expensive.

Bottom line?  If you haven't filed your personal property return, do so!  If you see your charter is not in good standing, fix this right away before the legal existence of the entity is terminated.    

New Business Online Filings for Maryland

In a business-friendly move, Maryland is rolling out the ability to electronically file the annual personal property returns.  Every business in Maryland (sole proprietorship, non-profit, LLC, corporation, partnership, etc.) must file an annual return with the SDAT, due April 15.  Most entities (LLCs, Stock Corporations) will pay a filing fee of $300.  Every business must report the personal property or "stuff" it uses to conduct its business.  After the SDAT reviews, it assesses a tax based on the personal property.  In the past, one had to fill out and mail these forms.  

Find yourself facing April 15 and haven't filled out the forms yet?  Don't panic - Maryland offers a very easy (no penalty) extension of up to 2 months if you only ask!    

Private Loans

A friend wants to borrow money for his new business venture.   Your sister needs funds badly and is considering a short-term, high-interest loan.  Your best friend wants to buy a house and asks his aunt to give him a mortgage secured by the property.  Think these situations just need a promissory note to be legal?  THINK AGAIN!  

The general legal document for a loan is a PROMISSORY NOTE.  When a loan is secured by Maryland real estate, there will be a DEED OF TRUST (commonly called a mortgage) that gets filed in the LAND RECORDS.  In other secured loans, the collateral is the subject of a FINANCING STATEMENT or UCC-1.  However, lending or borrowing from private parties is not as simple as having the right type of legal document!  

The law imposes a host of different legal requirements for lenders.  Often, a lender must be licensed.  Loans may be subject to a variety of different restrictions.  Some types of loans cannot be made by unlicensed lenders.  Some types of loans require a recission period, or time when the borrower can back out of the deal.  The legality of some types of loans depends on the relationship between the parties or purpose or amount. 

To make things more confusing, the allowable interest rate varies with type and amount of loan. The general legal rate of interest in Maryland is Six Percent (6%).  However, there are many exceptions to this general rate and the legal rate of interest might be Twelve Percent (12%), Twenty-Four Percent (24%) or higher, depending on the circumstances. 

Penalties for illegal loans can be very steep.  Before entering into any loan arrangement it is wise to consult with legal counsel.  

Easier time for Non-Profits?

The IRS has announced a streamlined process for small non-profits.  Rather than an estimated 100+ hours to complete the lengthy application for exemption, a nonprofit that qualifies may file the drastically shorter, easier, streamlined application. 

This is a welcome change!   Arden Law Firm plans to reduce its customary rates for 501c3 filings by about 70% for those clients who qualify for the streamlined, "EZ" form!  

Entity Conversion - switch LLCs, corporate entities

Maryland recently enacted legislation in 2013 that allows for entity conversion.  What's that?  Simply put, it lets a business switch forms.  Lets say you started out as a corporation but find the tiers of shareholders, directors and officers too cumbersome for your small business.   Should you shut down the corporate entity and create a new LLC?   Well, you could, but that creates its own problems and need to transfer every asset, deal with the possibility of a taxable event and so forth.

Or what if you formed your entity outside of Maryland but realized that this means keeping up two sets of filings each year in your state of formation and in-state (with two sets of associated filing fees!)   Or what if you want to "merge" into a new business type but own real property for which Maryland would impose transfer and recordation tax?   

Enter the Conversion Statute.   You may be able to convert your foreign out-of-state business form to a local, domesticated Maryland entity.   Contact the firm for more informatio on how the statute could benefit your business. 

© ArdenLawFirm 2014-2018  Managing Attorney Cedulie Laumann, Esq.