by Martin Kessler
Board Certified Real Estate Attorney
Over the years, I have seen people make many mistakes in legal matters. Here are some hints to help avoid some common errors.
1. Don’t try to be your own lawyer.
The old adage is that he who represents himself has a fool for a lawyer. I have seen people try to save by buying forms at a stationery store and filling in the blanks. Often they do not understand what should go in the blanks and just as often the forms are inadequate. Legal requirements change and they vary from state to state. To avoid a mess, get professional help with legal matters.
2. Don’t buy or sell real estate without professional assistance.
For most people, the largest investment of their lives is the purchase of a home. It has become common for buyers to rely on real estate brokers to draft contracts and title companies to complete the transaction and issue title insurance. Often this works with no problem. Sometimes it does not. Neither can give legal advice. The duty of the title agent is to the title insurer. The duty of the real estate agent is to deal fairly and honestly with the parties. The duty of the attorney is to competently represent his client using his legal knowledge.
3. Avoiding Probate.
Do not inadvertently give up your Save Our Homes Cap on increases in tax assessment of your homestead property. Since 1993 the Florida constitution has limited the increase in tax assessments on homestead property (the “Save Our Homes” Cap). Some have unknowingly lost the benefit of their cap by deeding their property, sometimes in an effort to avoid probate. For example, a parent may deed the homestead to himself and his children, as joint tenants with right of survivorship. The idea is to avoid probate. But the change in ownership will cause the property to be revalued for ad valorem taxation on January of the following year because the change in title triggered revaluation under SOH. On the other hand if there is no change in ownership then the Save Our Homes amendment places a cap on revaluation of the lesser of 3% per year or the Consumer Prices Index, whichever is less. The cap will remain as long as the parent owns the property. Some think that better way is to create a Living Trust and convey the property to the parent as trustee with the heirs listed in the trust as beneficiaries. There is controversy about this because of a bankruptcy case that held that a trustee is not a natural person and can’t own homestead. If the trust is not used, another approach is after death to file a summary administration and a petition to determine homestead, both of which are less involved than a full probate. The trust could still be used for non-homestead assets and still avoid probate. If the homestead is placed in the trust, it is necessary for the trust to provide that the parents can live in the property in order to preserve the homestead exemption. See 77 Florida Bar Journal No. 9, Protecting and Preserving the Save Our Homes Cap by Richard S. Franklin and Roi E. Baugher III, October 2003. The parent can make changes to the living trust as often as desired and may change the beneficiaries more easily than with a deed. Warning: before transferring title, consider the effect of basis as described in the next paragraph.
4. Don’t lose stepped up basis.
If a person dies owning property which has appreciated in value over the years, those inheriting the property get the benefit of stepped up basis, i.e., the fair market value as of the date of death. If they then sell the property, their taxable gain is only the difference between the stepped up value and the sales price. If, instead, the decedent had transferred the property by deed to the heirs, the heirs would take on the basis of the person transferring the property(“carry over basis”), which could be much lower than the stepped up basis. Then if the heirs sell the property their gain would be higher, and the taxes higher.
5. Avoiding Probate can lead to unintended consequences.
People do all kinds of things to try to avoid probate. A lady comes to mind who conveyed property to her niece who lived in North Carolina, reserving a life estate to the aunt. Naturally, she expected to outlive the niece. The problem was that the niece, although younger, died first. The Aunt wanted to sell the property, but title was now vested in the niece’s children. It was necessary to have the niece’s estate in North Carolina probated and to obtain deeds from the niece’s children, who could have refused to cooperate. The aunt would have been better off naming the niece in her will, or in a living trust. The will or the living trust would have cost more than the deed but not in the long run.
6. Don’t blindly accept “Standard Forms.”
People seem willing to accept and sign documents when told that they are just standard forms. They do this with contracts, forms provided at a closing, and in other instances.The documents seem to be even more authoritative if they are printed, rather than typed. Sophisticated business people do not fall for this. They or their lawyers review the documents and require changes. One size does not fit all. Documents need to be adapted to the situation and the interests of the parties should be considered in drafting the language.The document presented to you may have been drafted to protect the other party, not you, or to protect the title company from claims by you. The role of the lawyer is to protect your interest.
7. Don’t hold appreciating real estate in a C corporation.
If you later need to take the property back out of the corporation, the transfer is a taxable event. The same would be true if held in an LLC taxable as a corporation, although not if in an LLC taxable as a partnership, or in a general partnership, a limited liability partnership and the like. In these cases (Called “Pass Through Entities”) tax is only paid once, by the individual, not twice by the entity = and again at the individual level.
8. Leaving out marital status in deeds or mortgages.
If property is homestead but titled only in one spouse, the non-owner spouse still must join in the execution of the deed or mortgage, or if the owner is not married then the marital status of single must be recited. If the property is homestead, then after the name of the owning spouse should be the language, “joined by X, his or her spouse.” If the property is not homestead, such as a commercial property, then there should be recitation of that fact, e.g., by including this language in the deed or mortgage after the legal description: “The foregoing property is not the homestead of the grantor or mortgagor.” Failure to show the marital status or non-homestead status or if required including the joinder of the spouse can render the deed or mortgage void or voidable.
9. Failure to obtain the signatures of two witnesses to a deed.
If the signer is an individual there must always be two witnesses. The writer had the experience of a realtor bringing a deed to the closing, already signed by the seller, but lacking any witnesses. Different rules apply if the grantor is a corporation. No witnesses are required on mortgages.
10. Contracts for the sale of land must be written.
On the other hand if there is an exchange of writings, such as emails, that do not contain all the terms, be careful to state that this exchange of emails is only a negotiation of part of the terms and will not constitute the contract and that the final written contract is to be prepared and signed by the parties. Otherwise an exchange of letters, emails, and telegrams, could be claimed to be the final contract.
11. The contract should provide for title insurance, which by local custom is provided by the seller to the buyer, although, the contract can provide otherwise.
However it is not advisable for a buyer to forgo title insurance which provides deep pockets to pay for failure of title, title defects, or title being other than as insured in the policy. Title insurance can also protect against forgery, survey defects (if you have a survey which is in error and the survey exception was deleted), construction liens (if the standard exception for construction liens has been deleted), and parties in possession who may claim an interest in the property (if the standard exception has been deleted).
The foregoing should not be relied upon as legal advice as individual circumstances may make a difference. Consult an attorney before acting on this information. No attorney client relationship is created by the posting of this article.