In December 2010, Congress introduced something new: Portability. Traditional estate planning has used Credit Shelter or Bypass Trusts to preserve the estate tax exemption amount of the first spouse to die (The estate tax exemption amount is the amount you can pass to the next generation without paying estate tax. It is currently $5 million). Portability allows the surviving spouse to claim the unused portion of the estate tax exemption of the first spouse to die.

For example, consider a couple, Julie and Dan, with a combined estate of $4 million. Assuming their entire estate is community property, this would mean that Dan and Julie each have an estate of $2 million. Now, if Dan died in 2011 without doing any estate planning, Portability would allow Julie to claim Dan’s unused estate tax exemption amount: $5 million exemption minus $2 million estate leaves $3 million unused exemption amount for Julie to claim. Added to Julie’s own estate tax exemption of $5 million, Julie would be able to pass a total of $8 million (if she died this year).

However this amount could change if the estate tax exemption amount changes. If the estate tax exemption amount goes down to $1 million (as it is scheduled to in 2013) then when Julie dies (assuming Portability is extended) her estate would only be able to claim $1 million instead of the $3 million from Dan; this is because Portability uses the lesser of the two.

While portability is a great concept, there are some more traps for the unwary.

First, Portability requires an estate tax return to be filed, even if no estate tax is due. This can be an added burden and expense.

Second, there is a remarriage trap: Portability applies only to the last deceased spouse. So if Julie remarries a man who has used his entire exemption amount and this new husband predeceases her, she will only have her own exemption amount to shelter her estate from estate tax.

Third, Portability expires at the end of 2012. It remains to be seen whether Congress will make Portability permanent. So unless Julie and Dan both plan to die in 2012, they shouldn’t rely on Portability.

Finally, there is no asset protection as with a Credit Shelter/Bypass Trust.

It seems that for the time being Portability is only effective as a backup for failure to plan. Even if Portability becomes a permanent fixture, there are still valid reasons for using traditional estate planning with Credit Shelter/Bypass Trusts.

Disputes in a variety of contexts often are the reason for contacting an attorney.  Problems between neighbors tend to hover near the top of the list.  When a problem with a neighbor arises, it’s natural to want to turn to an attorney for advice on how to resolve things.  Certainly when disputes become heated and emotional, an attorney can be best for handling negotiations toward resolution.  Attorneys can advise you of your legal rights and remedies.  You also should contact an attorney if you have been served with a lawsuit or generally do not feel safe or comfortable handling a situation on your own.  But in many other circumstances, a call to an attorney might not be necessary.

Does Your Neighbor Know They’re Annoying?

Whether it’s fences, pruning, parking, a basketball bouncing late at night, an off-leash dog, overhanging trees, a property line issue, or noise due to paper-thin walls, most people  – especially those living in increasingly dense communities  – will experience annoying neighbors.  (You might be one!)  Even once-minor annoyances can become stressful after a while, leading to division and hostility.  And when tensions rise, so, too, does the inclination to ask an attorney to deal with the neighbor for you.  You may eventually need an attorney.  But usually the first question an attorney will ask is this:  “Have you talked to your neighbor about the problem?”  Perhaps that sounds like a silly question.  But often the answer is “no,” and the typical explanation is that either you didn’t know what to say or you wanted to avoid a confrontation with your neighbor.  Those are very reasonable and natural reasons for avoiding the conversation.  On the flipside, involving an attorney at the outset can be costly and could escalate the problem unnecessarily.

Be Friendly and Direct

So, assuming you otherwise get along with your neighbor or haven’t already addressed the problem to no avail, the two of you should just talk.  Perhaps your neighbor simply isn’t aware that while she is at work her son is bouncing a basketball into the wee hours, or that limbs from her tree are hanging over your fence, or that there is a leash law, or that her kids kick the wall when you’re trying to sleep!  So put yourself in her shoes.  If you were the annoying one, wouldn’t you rather be approached by your neighbor and given an opportunity to rectify the problem, than to be first blindsided by your neighbor’s attorney?  The first conversation might be difficult.  But if you keep it friendly and assume your neighbor doesn’t even know you are annoyed, you might just be able work it out on your own.

Amendments to the Homeowners Association statutes, RCW 64.38 et. seq., go into effect on January 1, 2012, requiring all homeowners associations with significant assets to perform and disclose reserve studies to owners. A homeowners association with “significant assets” under the amendments means that the current replacement value of the major reserve components is seventy-five percent or more of the gross budget of the association, excluding the association’s reserve account funds. RCW 64.38.010(19). If the homeowners association meets this threshold, then a new section of RCW 64.38 requires the association to have a reserve study prepared by a reserve study professional unless doing so would impose an unreasonable hardship. This study should be updated annually, and at least every three years should be prepared based on a visual site inspection.

The amendments also impose new disclosure requirements on homeowners associations. Along with the proposed budget presented each year to owners for a vote, generally the following additional information must also be disclosed to owners:

1. The amount of regular assessments budgeted for contribution to the reserve account.

2. Any additional or regular assessments scheduled to be imposed on owners.

3. Whether current projected reserve account balances are sufficient to meet the association’s major maintenance obligations during the next thirty years.

4. What additional assessments may be necessary to ensure sufficient reserve account funds.

5. The estimated amount recommended for the reserve account for the next fiscal year, and for the next five years, based on the most recent reserve study.

6. If the funding plan is implemented, the projected reserve account balances in each of the next five budget years and the percent funded for each of those years.

Completing a reserve study with a reserve study professional can be a significant expense for an association. Failing to do so can subject the association to potential lawsuits that may include recovery of attorney fees under new amendments. If the cost of preparing a reserve study exceeds five percent of the association’s annual budget, the association does not have significant assets, or there are ten or fewer homes in the association, the association is not required to follow the new reserve study requirements in RCW 64.38. If you have additional questions about this or any other owners association matters, please contact Kellie Gronski.

The Washington Legislature recently adopted changes to the Deed of Trust Act intended give distressed homeowners new rights in the foreclosure process.  The new law, known as the Foreclosure Fairness Act (“FFA”) takes effect July 22, 2011.  The FFA requires lenders holding loans secured with owner-occupied residential real estate (“Qualifying Loans”) to postpone starting foreclosure until after the borrower is given notice (“FFA Notice”) of the rights available under the law.  These rights include:

(i)         Consulting with a housing counselor or attorney,
(ii)        Meeting with the lender in-person to discuss foreclosure alternatives (e.g., loan modification, short sale, deed in lieu of foreclosure, etc.), and
(iii)       Participating in a new foreclosure mediation program (if applicable).

The FFA is a significant new tool for borrowers who wish to delay foreclosure and open a dialogue with their lenders about foreclosure alternatives.  Also, the FFA gives certain borrowers a way to require their lender to engage in affordable mediation and give them information which lenders have been unwilling to provide.  Lastly, the FFA may give certain borrowers remedies to challenge a foreclosure sale or recover damages from their lender.

The FFA lengthens the foreclosure process in Washington for Qualifying Loans. Under the FFA, lenders holding Qualifying Loans can’t send a Notice of Default (the first notice in a Deed of Trust foreclosure) for a certain period of time after giving a written FFA Notice.  The length of the postponement period depends on whether or not the borrower responds to the FFA Notice.  The borrower must respond to the FFA Notice within thirty (30) days following the date of the FFA Notice.  If the borrower fails to timely respond, the lender may proceed with the Notice of Default at the end of the thirty day period.  If the borrower does timely respond, the lender must wait to send the Notice of Default until ninety (90) days after the FFA Notice was sent.  The FFA Notice requirements do not apply if the borrower has surrendered their home or filed for bankruptcy and to Lenders holding Deeds of Trust securing commercial loans or seller-financed sales.

The FFA gives borrowers under Qualifying Loans the right to an in-person meeting with to discuss foreclosure alternatives. The FFA Notice must specify how a borrower may respond to the FFA Notice and give the borrower an opportunity to meet with the lender.  The purpose of the meeting is to discuss (i) the borrower’s financial ability to modify or restructure the loan, and (ii) explore options to avoid foreclosure, such as a short sale or deed in lieu of foreclosure.  Unless waived in writing, the meeting must be held in person.  The borrower’s housing counselor or attorney may request and participate in the meeting.  The meeting must be attended (in person or by phone/video conference) by a representative of the lender authorized to modify the loan or approve a foreclosure alternative.

The FFA creates a new foreclosure mediation program for Qualifying Loans held by lenders which foreclose more than 250 Deeds of Trust per year in Washington. Mediation is only available by a referral from a housing counselor or attorney.  The referral to mediation must be made before a Notice of Trustee’s Sale is recorded.  A Notice of Trustee’s Sale cannot be recorded until the mediator has certified the completion of mediation.  A referral to mediation must be made writing to the borrower and Washington State Department of Commerce (“DOC”).  Within ten (10) days of receipt of the referral, the DOC will notify the lender and the borrower and its counselor or attorney of the mediation referral.  The DOC notice will identify a mediator (chosen from a list maintained by DOC) and certain information to be provided by the parties.  The mediation fee cannot exceed $400 for a mediation lasting up to three (3) hours.  The fee must be shared equally by the lender and borrower.  Unless otherwise agreed, mediation must be held within forty-five (45) days after the DOC notice.  The mediation must be attended in-person, but a lender representative authorized to agree to a resolution may appear by phone/video.  The mediator must send written notice to the parties of the time, date and place of the mediation at least fifteen (15) days before the mediation.

The FFA requires certain lenders to share information with their borrowers. The parties are required to share the following information at least ten (10) days prior to the mediation session.  Failure to timely provide such information is a violation of the duty to mediate in “good faith”.  The lender must give the borrower and mediator:  (i) statement of the loan balance, (ii) copies of the note/Deed of Trust, (iii) evidence that the lender is the holder of the note, (iv) statement of arrearages, (v) estimate of fees/charges owed, (vi) payment history, (vii) data used for net present value analsyis, (viii) explanation for denials of earlier applications for foreclosure alternatives, (ix) most recent appraisal or BPO, and (x) excerpt of any pooling/servicing agreement cited as reason for denial of application for relief.  At least ten (10) days before the mediation, the lender must give the borrower and mediator:  (i) statement of current/future income, (ii) list of debts/obligations, and (iii) tax returns for past two (2) years.

The FFA may give borrowers who participate in mediation the right to challenge foreclosure. The parties to mediation under the FFA have a duty to mediate in good faith.  The FFA specifies certain actions or failures to act that constitute a violation of the duty to mediate in good faith.  Violations include:

(i) failure to participate in the mediation

(ii) failure to timely share required information

(iii) failure to pay the party’s share of the mediation fee

(iv) failure to send an authorized representative to the mediation

(v) a request by the lender that the borrower waive future claims.

Within seven (7) days after the mediation, the mediator must certify, among other things, whether the parties participated in “good faith” in the mediation.  If no agreement is reached at the mediation and the mediator certifies that the lender acted in “good faith”, then the lender may proceed with foreclosure.  If the mediator finds that the borrower failed to mediate in “good faith,” the lender’s remedy is to proceed with foreclosure.

However, the consequences for a lender found not to have mediated in good faith are potentially severe.  If the mediator finds that the lender did not mediate in good faith, the borrower has a rebuttable defense to the foreclosure.  Additionally, if the mediator finds that the net present value of a modified loan exceeds the anticipated recovery at foreclosure, the borrower may enjoin the foreclosure.  It is not clear how the right to “enjoin” differs from the right to “defend” against the foreclosure.  Also, if the lender has recorded a Notice of Trustees Sale before receiving the mediators certification and the mediator later issues a certification that the lender mediated in bad faith, the FFA states that “the trustee may not proceed with the sale”.  In such instance, it is not clear what is required for the lender to continue with the foreclosure.  Additionally, the FFA defines a failure to act in good faith in the mediation or provide the required FFA Notices as an “unfair or deceptive act in trade or commerce” under the Washington Consumer Protection Act.  This could allow borrowers to recover triple damages and attorneys fees.