Things to Think About When You Buy a House in California

Things To Think About When Buying a House

There are a couple of things in life that make us feel like we are true adults. Buying a house is a big one. Suddenly, you realize that buying a house means getting your finances in place, taking on a mortgage, getting insurance…basically full on adulting. Fortunately, the excitement of finally owning your own home makes all of the hoops you have to jump through totally worth it. Plus, you have realtors and mortgage brokers walking you through the process which makes the difficult parts a whole lot easier.

Once you own the home, you are generally left to your own devices to pay your mortgage on time, hire your own plumber and pay your property taxes. But there might be one final part of the home buying process that you didn’t quite consider. What happens to your home after you die? As an estate planning attorney, I realize that no one likes to talk about their own death. But buying a house in California is a big deal and you should make a plan for what happens to that house when you die.

If you have a spouse it is likely that you are both listed as owners of the house even if you are not both on the mortgage. This means the deed of the house has both you and your spouse’s name. But what language comes after your name? Did you know there are a few different ways that you can own your house? It is possible that when you signed the closing documents you checked a box that made that decision. You can own your home individually or as joint tenants, tenants in common or community property with your spouse. How you own your home affects what will happen to your home when you pass away. This is a huge decision and might be one you didn’t spend much time thinking about when you bought it.

If you are married, it’s likely that you own your house as either joint tenants or community property with right of survivorship. What’s the difference between joint tenancy and community property and what will happen to your house if you pass away? Thankfully, both joint tenancy and community property with right of survivorship allow for your property to pass to your spouse automatically when you pass. But what will happen when both you and your spouse pass away?

If you don’t have a living trust in place it’s likely that your estate will need to be probated. The reason is that in California, assets over $150,000 that are not jointly held will need to be probated in order to pass to your heirs. So if you and your spouse own a house as joint tenants and your spouse dies, the house will pass to you without probate. But on the death of your spouse, without a trust, your estate will need to go through the probate process if it’s over $150,000. Let’s be real, if you own a home in California, it’s probably over $150,000 so to probate land your estate is likely to go.

If you are single, it’s even more important that you have an estate plan because your estate will be probated and you might not like who the state decides to give your assets to. We won’t go into how annoying and expensive the probate process is because we’ve covered that before.

So if you are married how do you decide between holding title as joint tenancy or community property? If the house is, in fact, community property (acquired during marriage out of community property funds), it’s probably best to hold title as husband and wife as community property with right of survivorship. For most of my estate planning clients in this situation, I make sure to deed their house first as community property with right of survivorship before transferring it into the trust. Why? Because holding title as community property allows the second spouse to die to receive a “double step up in basis”. This means that when the first spouse dies, the second spouse gets to use the date of death value of the entire property as their new tax basis. For example, if you purchase a house for $300,000, that is your tax basis. But if your spouse dies 20 years later and the fair market value of your house is $1,000,000 on the day your spouse dies, that is your new stepped-up tax basis. If you then turn around and sell your house, you will only pay capital gains on any amount over the new stepped-up basis of $1,000,000.  Who knew, checking a box could make such a big difference on the taxes you pay years down the road?!

A recap for those who are married and buying a house consider: 1) Checking the box that says husband and wife as community property with right of survivorship; 2) Getting a living trust in place and make sure to transfer title of your house to the trust to avoid probate. For those who are unmarried its even more important that you get a trust in place to avoid probate and make sure your house passes to the person of your choice. 

Of course, this article is meant to be a brief introduction and shouldn’t be considered legal advice. If you have questions, please contact us, we would love to hear from you!



How the New Tax Bill Will Affect Nonprofits

How the New Tax Bill Will Affect NonprofitsBy now, you undoubtedly have heard that there have been some major changes to the federal income tax system. If you run a nonprofit, you might have heard some pretty scary things about how these changes will affect your donations for the coming years. It is true that these changes will affect individuals, corporations and also nonprofits. It is estimated that the changes to this bill could result in as much as a $20 billion reduction in charitable contributions. In this article, we will discuss how these changes may impact your nonprofit organization and what you can do to make sure your nonprofit continues to thrive.

Under the old tax laws, individuals who itemized their deductions could deduct charitable donations up to 50% of their Adjusted Gross Income (AGI). Under the new laws, individuals can deduct charitable contributions in an amount equal to 60% of their AGI. On the face, this would seem like positive change for nonprofits and in some ways, it just might be. This particular change is meant to incentivize large donors to make even more charitable donations.

The problem for nonprofits is the fact that fewer people are likely to choose to itemize their deductions and instead will take the standard deductions as the standard deductions have increased. Remember, you can only take a deduction for charitable contributions if you select itemized deductions and not the standard deductions which are set to increase.

Some think that the number of people who itemize their deductions will drop from nearly 30% to just 5%. So this will mean that people who were making charitable donations to your nonprofit for the purpose of taking a deduction on their tax returns may not do so. But guess what?

Wealthy Donors Are Likely to Continue Giving and Increase Their Donations

A study done last year by the Institute of Policy Studies found that in 2016, Americans gave $373 billion to charity. According to Chuck Collins with the Institute, this increase in charitable contributions actually came from wealthy donors and their private foundations. In fact, charitable donations from lower and middle-class Americans has declined by about 25% in the past 10 years. If this trend in charitable giving continues, the drop in charitable contributions might not decline as much as expected. Wealthy donors will actually be able to increase their charitable donations based on the increased deductibility limits.

Look at Your Donor List

It is important for you to take a hard look at where your donations are coming from. Are most of your donations coming from the general public? Do they consist of a large volume of small donations or do you have a few large donors? Do you get funding from grants or private foundations?

If most of your donations are coming from the general public, perhaps you may see a decline in charitable donations. However, if you rely on donations from large wealthy donors or private foundations, you might actually see an increase in donations.

Find New Ways to Attract Donors

It is true that some donors make charitable contributions for the purpose of taking a tax deduction. But many donors donate to a charity because they truly believe in the cause and donating makes them feel good. The fact that a donor may get a deduction on their tax return is an added bonus but it is not always the reason someone donates. Many people donate to their favorite charitable causes even though they currently choose the standard deduction and are not eligible for a charitable deduction.

The charitable deduction might just be the chocolate fudge on top of the ice cream sundae. Sure, ice cream tastes better with chocolate fudge but if it is not available we still want our scoop! Nonprofits should stop worrying about the changes to the tax bill and instead focus their efforts on clarifying their nonprofit mission. Find a way to tug at the heartstrings of your donors. You can do this by letting your donors know exactly where their donations will be going and how an increase in donations will help further serve your mission. Plan unique fundraisers that attract new donors. Reach out to your current donors and let them know how much you depend on their support.  Look for grants from private foundations that might increase their funding based on the changes to the tax laws.  Finally, always keep in mind every fundraiser’s favorite quote: “I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.” – Maya Angelou.


How to be a Superhero and Avoid Taxes with an S Corp

how to avoid taxes with an s corp
If you know you want to form a business entity and you are looking at what type to form, an S Corp may be the perfect entity choice for you. S Corps have some very attractive features which I will discuss below. There are a bunch of reasons you may not be eligible to form an S corporation or may be better suited to form an LLC. We can talk about that too. Now, let’s get to the fun stuff!

Let’s start from the beginning. What is an S Corp?

An S Corporation is actually just a regular old corporation. A corporation is a business entity type formed by filing Articles of Incorporation with the Secretary of State.

You might be thinking “Wait! If an S Corp is a regular corporation, why do I hear that S Corps are better than C Corps? What’s the difference?”

I’ll make this easy. Imagine that having a corporation is like getting into your neighborhood telephone booth and coming out as a…SUPERHERO! When you have that superhero suit on you are invincible! You have liability protection! No one can sue you as a regular person only as a superhero. They can’t attack your Batmobile or your superhero mansion!
The problem with putting on that superhero suit is that you are now on the radar of the evilest villain in all the land…the IRS!

Still with me?

Now when you are on the IRS’s radar, they want to tax you because that’s what they do.
So they tax you as a superhero (“corporate tax”) and again as a regular person (“individual tax”).
Now imagine you could get an invisibility shield from the IRS. This shield is an S Election and once you have it the IRS won’t tax you as a superhero but only as a regular person. You are now what is known as a “Pass Through” superhero and can avoid double taxation from the IRS! Woohoo!
Now. you get to go on with your Superhero business with all of your awesome superhero powers! But unlike other superheroes, you don’t have to be taxed twice! Of course, some Superheros might benefit from C Corp taxation but we can talk about that another time.

But wait, there’s more!

There is another amazing benefit to being an S Corp as opposed to being a sole proprietor (just yourself with no biz) or an LLC (taxed as a disregarded entity or partnership). The benefit is saving on self-employment tax. If you already have a business and you are getting hit with self-employment tax you might know what a drag that tax bill can be. Owners of sole props and LLCs (not taxed as S Corps) pay self-employment tax on the total income of the business. For example, your business makes $100,000- you pay self-employment taxes on that whole piece of the pie.
As an S Corp the company only pays self-employment tax on the amount of money paid to the employees of the S Corp in wages. This can result in some big tax savings! The catch here is that owners of the S Corp will need to pay themselves a reasonable wage. Shareholders of S Corps can also pay themselves through dividends which will not be hit with self- employment taxes.
Of course, it’s always important to talk to your own tax professional about when and how an S Corp can benefit you form a tax perspective.

If you are still with me, then your next question might be, “why would I want to be an S Corporation instead of just being an LLC?”

Often times LLCs are a great choice because they avoid a lot of the formalities of corporations. LLCs aren’t required to have meeting minutes and they don’t need to deal with electing and maintaining a board of directors and officers.
An LLC probably won’t work for you if plan on having investors or want to offer equity to your employees in the future. In that case, an S Corp is likely to be the best option for your business entity choice.

I am also going to blow your mind here…

LLC’s can also be taxed as S Corps. Yes, you can have your cake and eat it too!
LLCs can be taxed in different ways. Single person, LLCs are usually taxed as disregarded entities and LLCs with more than one member are usually taxed as partnerships. LLCs can also make an election to be taxed as an S Corporation or a C Corporation. If you are a small business that doesn’t intend on taking on investors, an LLC taxed as an S Corp may be the Superhero choice for you!

Reasons why you won’t be able to be an S Corp

       1. You have or want foreign Investors
       2. You have or want more than 100 Owners
       3. You want to provide different types of stock (Common and Preferred)
       4. You have or want an owner that is a business (not an individual) 
As always, this is just a glimpse of the law and you should definitely contact us if you need help deciding which business type is right for you!

5 Reasons Why You Need an Estate Plan

5 reasons why you need an estate plan

1. To Avoid Court

Did you know in California if you own assets over $150,000 in your individual name, your estate is likely to be probated?  This means that after you die, your beneficiaries will have to go to court in order to get your assets. A trip to the courthouse isn’t exactly the most generous of parting gifts. To make matters worse, the probate process can take over a year. That means your loved ones will be left settling your affairs long after you have passed. Probate is also public so plan on everyone knowing exactly what you have and who its going to. How can this be avoided? With a living trust. Having a will is just not enough to avoid probate. A will can help decide who gets your assets but it wont achieve the goal of avoiding probate, for that you will need a living trust.

 2. To Decide Who Gets Your Assets

If you don’t have a will or trust in place, you don’t get to decide who gets your assets. The California laws of intestate will decide for you. Sometimes, this can be okay but for many of us with complicated family situations or a desire to provide for more distant relatives or friends, leaving this decision up to the state just doesn’t’ make sense. With a trust, you can easily divide your estate in any manner that you want. You can provide specific gifts to certain individuals, give money to charity, or give your children cash distributions at set ages.

3. To Choose Who Will Take Care of Your Kids

Part of your overall estate plan includes a will as well as a trust. The will allows you to appoint a guardian for your children. The choice of who will take care of your kids when you die is often something that keeps parents up at night along with the crying baby! While it can be a hard thing to think about and plan for, the alternative of leaving these decisions to the courts is unthinkable. There are so many factors that go into this important decision. There is really no decision that is more important than deciding who will raise your kids if you can’t. Putting your guardian nominations into your will ensures that your kids are taken care of by someone that you love and trust.

4. To Save Money

The probate process is very expensive. Personal Representatives and Attorneys that assist in probating an estate are entitled to fees that are set by statute. For an estate worth 1 million dollars, the executor and attorney are each entitled to $23,000. For an estate worth $500,000 they are each entitled to $13,000. Your hard-earned money is better left to your loved ones than to paying fees that could have been avoided if you had a trust in place.

5. To Make Important Healthcare Decisions

Your estate plan also includes a health care directive which appoints an agent to make health care decisions on your behalf and allows you to make some of those important healthcare decisions in advance. Having a healthcare directive in place ensures that your healthcare decisions are made in advance by you so that these important decisions are not left up to chance.

7 Steps to Starting a Nonprofit

What Are the Steps to Starting a Nonprofit?

Starting a nonprofit organization can be both exciting and overwhelming.  Our guide, 7 Steps to Starting a Nonprofit, will walk you through the process of forming a nonprofit.  Although the process is complicated, this simple explanation will give you a roadmap of what to expect along the way.  When you are ready to start your nonprofit, schedule a call and we will provide you with a free 20-minute consultation.

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How to Start a Nonprofit Organization

How to Start a Nonprofit Organization

Tax Exemption and how to start a nonprofit organizationDo you have a cause you are passionate about? Have you always thought about starting a nonprofit but have no idea where to start? We can help. Let’s start from the beginning.

File Articles of Incorporation

Once you decide you are ready to form a nonprofit corporation, it is important that you decide which type of nonprofit corporation to create. There are a few different choices in California, including a nonprofit public benefit corporation, nonprofit mutual benefit corporation and nonprofit religious corporation. In order to create a create a nonprofit entity, you need to file Articles of Incorporation with the California Secretary of State. It is important that the Articles contain specific language which the IRS will be looking for the organization applies for tax exemption.

Obtain Employer Identification Number

The EIN or FEIN is the federal identification number of your nonprofit and will be needed to file tax returns and obtain tax exempt status with the IRS. The EIN can be obtained online through the IRS website.

Elect a Board of Directors

Nonprofits don’t have shareholders or owners of any kind. Instead, nonprofits are managed by their Board of Directors. Nonprofits should ideally have at least 3 directors serving on the board. These individuals are responsible for protecting the charitable assets of the nonprofits and making decisions on behalf of the nonprofit.

Elect Officers

The Board of Directors elects the officers. In California, nonprofits should have at least a President, Secretary and Treasurer. The officers handle the day-to-day operations of the organization and serve at the pleasure of the Board of Directors.

Adopt Bylaws

Bylaws are the governing rules of the organization. The Board of Directors should approve and adopt the bylaws at the first meeting of the board. The bylaws of a nonprofit are extremely important because they create the set of parameters for the nonprofit to follow. It is crucial to have bylaws that reflect the current operations of the nonprofit. Otherwise, the organization may risk having certain actions taken by the officers and directors invalidated because they were not in compliance with the bylaws.

Obtain 501(c)(3) Status

Forming a nonprofit corporation does not guarantee tax exempt status. Nonprofits need to apply with the IRS in order to gain tax exempt status and have donations to the nonprofit be tax deductible. For nonprofits seeking exemption under IRC Section 501(c)(3), this is done by filing a 1023 application with the IRS. This application is quite fact intensive and requires the nonprofit to provide details on its programs, operations, activities, funding, and budget for the next 3 years.

Obtain Tax Exempt Status in California

Many California nonprofits forget this crucial step. After obtaining 501(c)(3) status with the IRS, nonprofits in California must also apply for tax exempt status with the Franchise Tax Board. This is important because California imposes an annual $800 minimum tax unless the organization obtains tax exempt status on a state level.

Register with the Attorney General Registry of Charitable Trusts

Nonprofits in California must register with the California Attorney General. The reason for this is that the Attorney General regulates nonprofits to ensure that charitable assets are not being misappropriated. Each year a nonprofit must submit a filing with the Attorney General to remain compliant.

If you want assistance forming your nonprofit, SLG can help. We represent nonprofits from the beginning. Let us complete the formation and exemption process for you so that you can focus on serving your charitable mission. We offer nonprofit formation on a flat fee basis that can be broken down into affordable installments.  Schedule your free 20 minute consultation today.


How to Start a Business

A Step-by-Step Process on How to Start a Business

When determining how to start a business, there are many factors to consider.  Semanchik Law Group (SLG) attorneys are experts in business law and will help you figure out the path you need to take.  SLG will walk you through launching your business and will provide insight before you get started.

First and foremost, new business owners need to consider what type of entity they would like to form.  Every situation is different and it is imperative to speak to an attorney before you make any decisions.  Once you have selected the best entity for you, the next step is to file articles with the Secretary of State.

Following the business formation, new business owners need to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).  The process of obtaining an EIN from the IRS does not take very long but choosing the wrong entity can be devastating for future reporting requirements.  This number is similar to an individual’s Social Security Number.  It acts to identify the business to the IRS for tax purposes.

Once you have an EIN, new business owners need to choose a tax election.  Note: when an individual asks to form an S Corp, they are really choosing a tax election, not an entity type.  From there, a business owner will file with the Department of Business Oversight.  Finally, you must file a Statement of Information with the Secretary of State.

Forming your business is only the beginning of the process.  Depending on the entity type, businesses carry annual requirements including filing requirements, fees, notices, and tax payments.  SLG can not only help you start your business, but they will ensure you are compliant for years to come.  Request a free consultation from a qualified attorney today!

Have you ever wondered how to start a business? Semanchik Law Group will walk you through how to launch your business, beginning with the selection of the entity type.

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