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The Real Estate Closing Attorney’s Role

A typical house hunter is very selective about which real estate broker they work with, looking for good chemistry, responsiveness, experience and professionalism.  It makes sense to give the same careful consideration to the often-overlooked choice of “closing attorney.” The decision should not be taken lightly: the closing attorney will interact with a buyer constantly during the time period leading up to closing, and as illustrated below will handle many tasks that are crucial to protecting the buyer’s interests and ensuring a smooth closing.  Moreover, it is advisable to engage a trusted and well-qualified attorney before making an offer to purchase, as the offer will dictate the key terms of the subsequent purchase and sale agreement. Most purchasers are unaware that they may choose their closing attorney, and it need not be one from the list that the lender proffers.  Following the signing of an offer to purchase, the closing attorney, in collaboration with you and the lender, will:

• Negotiate the purchase and sale contract (which the Seller’s attorney initially drafts);
• Explain the purchase and sale contract’s terms and the conditions to closing;
• Perform a title search to reveal any covenants, easements, liens, etc. registered against the property that will impede your ownership, and then address these encumbrances;
• Order a municipal lien certificate to verify that property taxes and other municipal charges on the property have been paid;
• Coordinate the issuance of title insurance policies to the lender and the home buyer;
• Coordinate with the lender for the preparation and delivery of numerous documents to be signed at closing, including the mortgage, promissory note, truth in lending disclosures, and most importantly, the HUD-1 settlement statement. As outlined in the HUD-1 settlement statement, the closing attorney is responsible for (among other things) ensuring the:
  • payoff and discharge of existing mortgages;
  • payment and allocation of real estate taxes and utilities between buyer and seller;
  • payment of realtor commissions;
  • disclosure and payment of lender fees and closing costs;
  • funding of the mortgage escrow account;
  • payment of transfer taxes and recording fees;
  • payment of pre-paid interest; and
  • distribution of sale proceeds.

The closing attorney also schedules a date and time for the closing.  On the day of closing, the attorney explains the numerous documents to be signed by the buyer and seller, obtains signatures from both parties and collects and distributes all funds.  Immediately following closing, the closing attorney performs a title rundown to ensure there were no last minute changes in title and delivers the deed, mortgage and other recordable instruments to the registry of deeds to be officially recorded. You can count on the pragmatic and responsive attorneys at Freed Law LLC to navigate you through your new home’s closing in a timely and effective manner.

Please visit our friends at Luxury Residential Group LLC, a boutique real estate agency focusing on buyer and seller representation.

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Wealth Transfer And Tax Efficiency

There are many reasons that individuals are reluctant to make lifetime (inter vivos) gifts a part of their estate plan.  The most fundamental reason is the loss of control over the transferred assets, and the accompanying fear that a donor’s remaining wealth may not be adequate to support him or her for the remainder of his or her life.  Another commonly cited objection to making a lifetime gift is the belief that an at-death (testamentary) gift is more tax-efficient; i.e., the belief that deferring taxes until death allows a larger asset base to grow and compound before it is passed along.  While the first concern is a very personal and subjective one, the second is generally unfounded.

Inter vivos gifts tend to be more tax-efficient because gift tax is computed only on the value of the gift received by the donee — the dollars used to pay the gift tax are not themselves subject to the tax.  In contrast, the funds used to pay the estate tax are themselves subject to the tax — the estate tax is calculated on the entire taxable estate, not just on the residue that passes to beneficiaries after the payment of the estate tax.  In addition, since assets tend to appreciate over time, paying taxes earlier in time typically means paying taxes on a smaller asset base.  Moreover, a “tax-exclusive” lifetime transfer typically remains superior to a “tax-inclusive” testamentary transfer despite the advantage of a step-up in tax basis of an asset transferred at death; in other words, from a tax standpoint it is ordinarily not sensible to retain property until death simply in order to obtain a new basis on the transferred property.

Of course, this discussion assumes a contemplated transfer of assets in excess of the unified gift and estate tax filing thresholds — currently $1 million at the Massachusetts level and $5.12 million at the Federal level.  If you are fortunate enough to have this “problem,” you should strongly consider making a transfer this year, as the Federal exemption is scheduled to revert to $1 million on January 1, 2013.  For practical assistance in formulating a tax-efficient wealth transfer strategy, reach out to Freed Law LLC.

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IRA Inheritances And Tax Strategy

Recently, the Senate abandoned a proposal to require the complete distribution of IRAs within five years of the deceased owner’s death. The proposal would have eliminated a huge tax advantage under the current law, which permits heirs to take distributions from an inherited IRA across their life expectancies. Currently, at age 70.5 an IRA holder is required to begin taking distributions, the minimum annual amount of which is calculated based on his or her life expectancy. In the event that such person passes away prior to depleting the IRA, there are several possible outcomes, the most common of which are (summarily) illustrated below.

1.  A non-spouse individual is named as beneficiary:  In this case, the person inheriting the IRA begins taking distributions immediately, pro-rated across his or her life, presenting a substantial tax-deferral opportunity.

2.  The deceased names his or her spouse as beneficiary: If the account holder died prior to reaching age 70.5, the spouse may delay the commencement of distributions until December 31 of the year that the deceased would have turned 70.5. Additionally, a surviving spouse is permitted to roll over a distribution into his or her own IRA and name a new beneficiary, with the distribution schedule based on the new beneficiary’s life expectancy.  Moreover, if the surviving spouse is younger than age 70.5 and rolls over the IRA, he or she may delay the commencement of distributions until he or she reaches that age.

3.  The deceased names a trust as beneficiary:  As a general rule, one should not name a trust as an IRA beneficiary. Because a trust is not a person it has no life expectancy, and unless very technical requirements are met, the distributions will be based on the deceased’s remaining life expectancy (which would likely be much shorter than such a person’s children, for example).

4.  The deceased names his or her estate as beneficiary:  This will have the same result as #3 above – distributions to heirs will be required over a period based on the deceased’s life expectancy at the date of death.

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Planning For Incapacity

Nearly as unpleasant as contemplating death, is contemplating incapacity—the substantial impairment of one’s physical or mental faculties, whether temporary or long-term. While no one finds it easy to face the prospect of incapacity, failing to plan for the same can have dramatic negative consequences.

Financially, without proper planning, neither a legally incapacitated individual nor family member may have access to the individual’s financial resources, allowing unpaid bills to mount up, credit to be damaged, and liens on assets to be imposed. Property may waste while no one manages it, and investments can suffer with no one at the helm. An individual may also lose the advantages of timely and appropriate exercise of contractual or tax rights.

The medical consequences of incapacity may be equally damaging. Medical or mental health needs may go unaddressed because no one is authorized to consent to treatment for the individual. Choices for appropriate living arrangements or long-term care may be ignored because no one has authority to arrange for admission or entry to a suitable facility. In the absence of a valid legal document it may be unclear to the physician who has the authority to make therapeutic and course-of-treatment decisions on an incapacitated person’s behalf.

Without advance planning, managing an individual’s person and property will typically require probate court proceedings to establish a guardianship (control over a person) or conservatorship (control over a person’s assets). While these measures provide some degree of protection for the disabled person, their achievement can be extremely time-consuming and expensive. However, the greatest loss from having to resort to guardianship or conservatorship is the loss of the individual’s personal autonomy and control: the person under guardianship cannot choose who his or her legal representative will be, and such representative will require court approval for many of his or her duties.

Fortunately, there are a number of highly effective estate-planning measures that can ensure the efficient management of an incapacitated person’s healthcare and assets. As part of the estate-planning process, D’Ambruoso & Freed LLP’s attorneys will evaluate client needs to suggest appropriate instruments, ranging from the simple—healthcare proxies and durable powers of attorney—to the complex—revocable and special needs trusts. Count on Freed Law LLC to come up with a “right-sized” incapacity plan that will give you peace of mind.

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Title Insurance: Q&A

What is title insurance?

Title insurance is a product that few homebuyers understand, despite the fact that lenders require it to protect their interest in the property, and virtually all homebuyers opt to purchase an owner’s policy to protect themselves as well. In order to understand title insurance, you first must understand the meaning of “title” to a property.

What is a title?

Title to a parcel of real property is the sum of all the facts on which ownership of property is founded or proved. In connection with the purchase of a home, the closing attorney performs an examination of the title in order to detect any problems with the title that are “of record.”

What kind of title defects may not be detectable from a title examination?

Unfortunately, any number of title defects may not be matters of public record, and hence undetectable even in the course of the most meticulous search of such records. You may not learn of these “hidden defects” for many months or years after you close on your home, yet they could force you to spend substantial sums on a legal defense, and still result in the loss of your property. Any of the following matters could provide a basis for a claim after you have purchased the property:

• lost or forged deeds
• transfers by incapable persons
• fraudulent impersonation
• errors or omissions in deeds
• undisclosed heirs or mistaken interpretation of wills and trusts
• federal, state inheritance, and gift tax liens
• errors in tax records

How does title insurance protect me?

Your owner’s title insurance policy can protect you from all of these hidden risks.  In addition, your policy covers all legal expenses incurred in investigating, defending, litigating, or settling a claim against your title, even if that claim has no merit. Also, unlike most insurance products you do not have to suffer a loss of your property to make a claim—at the mere hint of a claim against your title, you should contact your title insurer.

How much does title insurance cost?   The one-time premium is directly related to the value of your home. Typically, it is less expensive than your annual auto insurance. It is a one-time only expense, paid when you purchase your home. Yet it continues to provide complete coverage for as long as you or your heirs own the property.

If my lender gets title insurance for its mortgage, why do I need a separate policy for myself?

Your lender will require that you purchase a lender’s title insurance policy. This policy only insures that the financial institution has a valid, enforceable lien on the property. It does not protect you. When a lender’s policy is being issued, the small additional expense of an owner’s policy is a bargain.

What should I do now?

Freed Law LLC is an authorized policy-issuing agent for Old Republic National Title Insurance Company. If you are considering, or in the process of, purchasing a home or a piece of property, do not hesitate to reach out to us for more information. For a one-time premium you can affordably protect the single largest investment you may ever make.

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