LIEB BLOG

Legal Analysts

Tuesday, August 09, 2011

Estate Gift Tax Rates to Change

Estate Gift Tax Rates to Change
The President's 2012 budget, released in mid-February seeks to return the Federal Gift tax exemption to $3.5 million, which was temporarily increased to $5 million, and the gift and generation skipping to $1 million, with a 45% transfer tax rate. The senate is divided. Republicans would like to remove the estate tax all together, while both would agree on $5 million exemption, however disagreeing on the tax rate (45% or 35%).

Further, it seeks to make portability permanent, meaning, a spouse can use their spouse's unused exemption permanently, whereas now it is set within specific time limits.

Also sought is a 10 year minimum and remainder value greater than zero for grantor retained annuity trusts (GRAT). GRATs allow transfer of wealth between family members at a reduced gift tax cost if the grantor survives the term. Dynasty trusts will also be limited (used in jurisdictions that do not follow the common law rule against perpetuities) with a 90 year maximum on new trusts or new monies to existing trusts.

Additionally, the new budget seeks restrictions by way of a new class of tax restrictions on valuation discounts which allow discounts in the valuation of family owned businesses.

Look out for changes nearing 2012.
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Anti-Deficiency in Short Sales: California

Anti-Deficiency in Short Sales: California
On July 15, 2011, a new law was enacted in California which prohibits deficiency judgments in short sale transactions. Short sale transactions are sales by homeowners to third parties, requiring lender approval, for less than the amount of the loan.

This applies to all 1-4 unit residential mortgages, whether first or later, and to borrowers as individuals, partnerships, LLCs, or corporations.

Originally, a law was enacted which prohibited deficiency judgments, but applied only to first residential mortgages by individuals.

This law may affect the bargaining position of homeowners with lenders regarding short sales, as it becomes a less attractive option for a lender where they are unable to get a deficiency judgment for the remaining amount of the loan. Many times lenders do waive this right, however, taking it off the table from the outset may be damaging to a homeowner's ability to procure the same, and further limits their options in foreclosure.

Although this law has not yet been enacted in NYS, California's enaction of the same, as well as the current state of the market and housing may appeal to NYS legislators and therefore it is something to keep an eye on into the future.
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HUD SAFE ACT

HUD SAFE ACT
On June 30, 2011, HUD (The U.S. Department of Housing and Urban Development) enacted the "Final Rule" for Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE), which lays out the minimum requirements for states concerning licensing and registration of mortgage loan originators.

This is important to pay attention to as licensure requirements are necessary in order to qualify as a loan originator, however it is also important to note who is exempt from the same. Further inquiry must always be made into state laws as they are free to expand on the minimum requirements laid out by HUD. However, after the original passage, states regulated tax-exempt organizations as well, so part of the purpose of this new Act is to remove that power from the states to do that.

This primarily affects non-profit organizations and HUD agencies, which provide services in foreclosure defense and inability to procure housing of financially distressed individuals.

SAFE Act's new standard for licensure is whether one is "engaging in business of a loan originator" and "take a residential mortgage application and offer or negotiate terms of a residential mortgage loan for compensation or gain".

These requirements are not limited to first loans, but also refinances, as these are not modifications, but instead are actually new loans in law and fact.

The new standards, differentiated from the 2009 act, allow HUD agencies and non-profits as exceptions to the requirements by way of codifying their role as different from a loan originator and therefore not requiring licensure. HUD has made it clear that this determination will be made based on the substance of a position, and not on its name. Consequently, a nonprofit's status under 501(c)(3) does not end the inquiry. Further analysis is required regarding the nonprofit's purpose, structure, incentives, and loan options. In fact, 7 criteria are used in order to further qualify:

1. Maintains tax-exempt status under section 501(c)(3) of the Internal Revenue Code of 1986
2. Promotes affordable housing or provides homeownership education, or similar services
3. Conducts its activities in a manner that serves public or charitable purposes
4. Receives funding and revenue and charges fees in a manner that does not incentivize the organization or its employees to act other than in the best interests of its clients
5. Compensates employees in a manner that does not incentivize employees to act other
than in the best interests of its clients
6. Provides to or identifies for the borrower residential mortgage loans with terms that are favorable to the borrower and comparable to mortgage loans and housing assistance provided under government housing assistance programs
7. Meets such other standards that the state determines appropriate

Also excluded from licensure requirements are government employees, bona fide nonprofit organizations that act as loan originators, although only in the course of their duties, and individuals who only engage in modifications or are 3rd party loan modification specialists. However the latter category could be subject to licensure under SAFE, but this is subject to determination of the Consumer Financial Protection Bureau (CFPB) as HUD has chosen not the regulate the same. Further, appendices of SAFE provide examples of the type of person not subject to the Act.



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