Blog No. 164 

April 4, 2023

 Reading Time: 8 Minutes

By Mack W. Borgen

University of California at Berkeley (Honors, Economics); Harvard Law School; National Award-Winning Author.

Call Me Anytime

General Business Planning

or Corporate, Business or Real Property Law Matters

805-450-2602

—

Quick Facts

U.S. Gift Taxation

Amount of Money You Can Give in Any Year to Any Donee without having any gift tax or gift reporting: $17,000 (or if you are married, you and your spouse may transfer 34,000 per done.)

Gift Tax Reporting: Amounts in excess of this amount may trigger gift tax reporting.

Gift Tax Liability and Maximum Rate: The liability for payment of the gift tax remains with the donor, not the done, and the amount of the gift tax is unified with estate taxes with a maximum rate of 40%.

Gift Giving Creativity – Money for College or To Cover Medical Expenses.  There are a number of methodologies by which money can be “given” to assist a child or grandchild) with their college expenses or to assist another person with their medical expenses.

American Families and Single Parenting

In the 1950s, less than 10% of families with children were single-parent families. As of 2022, that percentage had increased to 31% of all U.S. families.

While children living with their mothers remains predominant (appr. 70% of all cases as compared with 85% as of 1950s), it is becoming more and more common (appr 28%) for the children to live with the father.

Percentage of U.S. Workers in Unions

The percentage of U.S. workers who are members of unions is now at an all-time low – just 10.1% — compared with 20.1% just 40 years ago in 1983. The four industries with the highest unionization are utilities (20%), transportation and warehousing (15%), education (13%), and construction (15%).

Cancel Those Trips to the Cayman Islands!!

The Emergence of State Tax Havens

The Institute of Policy Studies recently identified 13 states as de facto tax havens. All but two have no estate or inheritance tax. Eight have no capital gains tax, five have no corporate income tax, and seven have to state individual income tax. Three states – South Dakota, Nevada, and Wyoming have none of these taxes.

The impacts of these types of tax structures – and their construction of de facto tax havens for the wealthy — can be evidenced in many ways. For example, Texas has no income tax, and thus it was “forced” to raise 61.8% of its tax revenue from the (extremely regressive) sales taxes in 2021. In contrast, only 16.9% of California’s taxes came from sales taxes while the biggest source of California’s tax revenues – indeed 59%, was from the state’s individual income taxes.

There are many other devices which are used to create “tax havens” as well. The lack of regulation regarding trusts, for example, works in tandem with low taxes as a means of creating perfect conditions for the very wealthy to avoid taxes. There is little evidence that the creation of a tax havens environment helps states to attract businesses or create jobs, it is notable that even a state like South Dakota now has more than Mt Rushmore, Wall Drug, and the Corn Palace to brag about – it also hosts an estimated $512 billion in trusts. Some of these states do not even have a designated life span for trusts – and several states have set the trust life limit between 300 and 1,000 years. Yes, 1,000 years. This can allow the wealthy to create de facto dynasty trusts to last for tens of generations without the payment of any inheritance or estate taxes. Sometimes, worse yet, it can greatly obfuscate who even really owns the assets.

No matter how viewed, the labyrinth of generation-skipping and tax avoidance trusts are all a long way from the W-2 and 1099 lives of most (nearly 99%) of all Americans workers and their families. And certainly, the long-term and wide-ranging social, political, and financial implications of these estate-planning “tools” are hard to articulate, let alone calculate.

Recent Business and Real Estate Cases 

General Sources: Daily or Periodic Judicial and Legislative Reports from various sources including the California Lawyers Association Daily Reports, the CLA’s Monthly Business Law News, and Announcements and Press Releases from the (California) State Attorney General Office. 

1. Real Estate Construction – Implied Warranty of Workmanship and Habitability. The Arizona Supreme Court joined a long list of states which have now held that an implied warranty of workmanship and habitability between homebuyers and builder/vender cannot, under any circumstances, be disclaimed or waived. The court dismissed provisions in the contract limiting such warranties and did so largely based upon “public policy considerations in the analysis of the subject contract terms. 

2. The Use of Representation and Warranties Insurance (“RWI”) in the Context of Commercial Real Estate Transactions. Investors in real estate have at their disposal many structuring options when acquiring real estate assets – buying the property directly, buying interests in entities which own the subject property, investing in REITs or private equity funds, etc. Each structure involves varying degrees of complexity, and to address some of the risks, the use of RWI is becoming more common. There are various kinds of RWI. Typically, the RWI falls into one of four (4) categories: (1) RWI regarding the seller’s right to transfer the property (e.g. good standing, due authorization, ownership), (2) RWI relating to the condition and status of the property (e.g. environmental compliance, “no violations or liens,: contracts, and litigation (or the absence thereof), (3)RWI regarding the revenue relating the property (e.g. financial statements, rent rolls), and (4) RWI regarding the potential liabilities that may arise in connection with ownership of (or ownership interests in) the property (e.g., no undisclosed liabilities, tax, and compliance with laws). It is recommended that the use (i.e., the purchase) of RWI should be at least considered in the context of most large commercial real estate transactions. 

3. Real Estate Housing Projects – The (Mis-)Use of California’s CEQA. Most California Environmental Quality Act (CEQA) lawsuits against construction projects in California involve housing. As of 2018, the percentage was more than 60%. Basically, CEQA is the litigation of choice by land use and environmental attorneys opposing housing construction, and arguably CEQA is itself (and especially the lengthy and costly environmental review process required under CEQA). While there are many aspects of this issue, some believe that CEQA (and the mandates thereof) must be revised in order to accelerate the resolution of the state’s housing crisis. It is beyond the scope of this article, but more and more considerations are (or at least possibly should be given to) evaluating the advisability of expediting the conversion of office space to residential use – this is in light of the fact that office vacancy rate is the highest it has been in nearly three decades and due to the growth of remote work, this vacancy rate may continue for many years.   

4. Landlord-Tenant Law – Caution for Landlords Regarding Security Deposits. Historically, letters of credit received from the Tenant have been one of the referred forms of security deposits assuring the Tenant’s performance under the lease. The main reason for this use of LCs was because the LCs would continue to be available to the Landlord even in the context of a tenant’s bankruptcy. More technically, this is because courts have generally held that the presentation of an LC to a third-party issue (e.g., a bank) would not violate the automatic stay of a tenant’s bankruptcy case – and thus, the landlord would remain at least partially protected. On the other hand, and in light of the 2008 and the more recent financial crisis, it should be remembered that LCs are not FDIC insured and could become worthless. Some clever real estate attorneys provide that a landlord can draw upon an LC based upon the circumstances of the lender – regardless of the status or financial condition of the tenant itself. It is recommended that both security deposits (whether currently in cash or LC form) should be periodically reviewed by prudent landlords – just as should these landlords conduct a periodic review of all of its insurance policies and programs. Note also that exactly parallel concerns exist in the context of representing a tenant since any security deposit funds delivered to the landlord would be at risk in the event of the landlord’s bankruptcy. In such instance and with respect to the security deposit, the tenant would be deemed a general creditor – and would likely only receive a pro rata portion of any security deposit portion. 

5. COVID-19 Business Income Losses Are Generally NOT Covered under Commercial Property Policies. More and more states are confirming, judicially or legislatively, that COVID-19 business income losses are not covered under property insurance policies. Although some of the reasonings vary, basically the courts have held, as did the Louisiana Supreme Court recently, that the “plain, ordinary and generally prevailing meaning” if the “phrase (direct physical loss of or damage to property” as used in such policies “requires the insured property sustain a physical … loss or damage.

6. Caution Regarding Use or Sale of Customer Data – Increasing Enactment of Privacy Legislation. More and more states are adopting varying forms of comprehensive privacy laws which severely restrict the businesses’ right to use or sell personal data of its customers. This is a quickly evolving area of the law and beyond the scope of this author’s area of practice, but caution is advised, and businesses should retain intellectual property or other counsel to review any plans for such use or sale of customer data.

7. Alter Ego Piercing – Ten (10) Specific Triggers. Too often, individuals believe that the mere use of a corporate entity shields them from direct, personal liability. However, this “corporate shield” can be pierced by the use of alter ego litigation in which the claimant seeks to impose direct, personal liability upon corporate or other entity officers. These types of claims continue to be prevalent in many court cases, and in California, such alter ego claims are (a) largely sought as an equitable remedy and (b) usually are combined with substantive causes of action. Courts are free to review many types of evidence in determining the validity of alter ego claims, but the following is a list of ten of the most frequent factors by which the courts determine in propriety of imposing personal liability despite some corporate structure: (1) disregard of legal formalities (and failure to maintain an arm’s length relationship among related entities, (2) failure to maintain minutes or other corporate records, (3) poor or inter-related recordkeeping and especially the failure to segregate funds amongst separate entities, (4) commingling of funds or assets between different entities or between one or of the owners and the subject entity (5) an absence of corporate assets or even a material under-capitalization, (6) failure to issue stock certificates or other evidences of ownership interests, (7) overlapping officers and directors, (8) the use of the same office or business location, (9) employment of the same employees or even attorneys, and (10) the unauthorized diversion of corporate funds or assets for other than corporate use. In the push and shove and struggles of especially new or rapidly expanding businesses, it is tempting (and easy) to dismiss these matters – but the avoidance of direct and personal liability for “corporate” actions (and, simultaneously) the protection of one’s personal assets is critical. To that extent and because alter ego claims can rather easily be asserted, it is recommended that “corporate formalities” be followed.

The White Binder

Sorry — My Nagging Personal Note

Some of us – I know – not you!! Are getting older.

In the context of arranging and organization my own personal affairs,

I recently completed my own personal copy of my The White Binder.

The White Binder organizes all the information necessary for my heirs, relatives, and friends.

It is detailed. It took me three (3) days to complete.

It is entirely up to you, and I know that as the author of this book, I am biased, but I highly recommended that you (and your spouse or living partner)

get and complete your copy(ies) today.

It will be incredibly helpful to you and for your loved ones.

In organizing your life, in compiling information about your assets, liabilities, contacts, and on and on.

And – In presenting your desires!!

I have the highest regard for estate planning attorneys and the services they provide,

But with respect to many aspects associated with one’s passing,

MERE ESTATE PLANS (AND TRUSTS AND WILLS) ARE NOT ENOUGH.

Each copy is personalized and is shipped to you in an easy-to-use binder format.

Get Your Copy Today

The White Binder

(3^rd Edition) (2022)

Order Today

Just email me at mwborgen@live.com (or call me at 805-450-2602)

• Give me your mailing addresses and the number of copies you wish.

Binder format $49.95 plus $6.95 Shipping

Pay After Delivery and Please Allow 10-12 Business Days.

So far, I have prepared more than 200 copies of this book for my friends and their loved ones.

The feedback has been wonderful and appreciated.

Copyright 2023 by Mack W. Borgen. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, except in the case of brief quotations embedded in critical articles or reviews, without prior written permission by the author.