[WSBARP] Recording a Deed with Two Excise Tax Exemptions
Eric Nelsen
eric at sayrelawoffices.com
Fri Oct 28 09:45:18 PDT 2022
I do think that the member vs. transferable interest owner isn’t really that big a deal, and I’m sure there is a workaround. As I re-read my own email, I realize that every point is really just a concern about the PR’s involvement, making arrangements concerning estate property that really don’t have any logical connection to settlement of the estate. If the PR is willing, of course all these matters can be handled with a TEDRA and encouragement to the heirs to lawyer up, etc., but because I’m lazy, in my mind that whole process is as much time and trouble as the heirs just getting their own lawyer to form the LLC. So I think the PR’s participation is ultimately unnecessary.
Re partition, yes, that’s true—but I tend to think of the right of partition as a benefit, not a problem. I have too much litigation experience with the nightmares of family members co-owning property. Partition is a ready-made and absolute solution, whereas judicially dissolving an LLC can be quite a bit more difficult. I like the background rules for management of TIC property, and I think that the formalities of voting, etc., involved with an LLC can often create greater friction among family members.
Sincerely,
Eric
Eric C. Nelsen
Sayre Law Offices, PLLC
1417 31st Ave South
Seattle WA 98144-3909
206-625-0092
eric at sayrelawoffices.com<mailto:eric at sayrelawoffices.com>
Covid-19 Update - All attorneys are working remotely during regular business hours and are available via email and by phone. Videoconferencing also is available. Signing of estate planning documents can be completed and will be handled on a case-by-case basis. Please direct mail and deliveries to the Seattle office.
From: wsbarp-bounces at lists.wsbarppt.com <wsbarp-bounces at lists.wsbarppt.com> On Behalf Of John J. Sullivan
Sent: Friday, October 28, 2022 9:23 AM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
Eric:
All good concerns. I have not and would not advise a PR to form an LLC unilaterally where there are multiple member/beneficiaries. If that ever became advisable I would negotiate it with a TEDRA Agreement incorporating the Operating Agreement and strong disclosures that everyone was encouraged to lawyer up and I was only representing the PR.
I have on a couple of occasions created an LLC for a sole beneficiary who was my PR client and then distributed the Member Units. I have also distributed property directly to a beneficiary’s LLC. Both times I did that I had the deed say we were doing it “at the direction of the Member/Beneficiary. I do that not only to deal with the REET issue (avoiding a two step) but also out of some concern about upsetting a title insurer down the road.
I would have to consider your issue about the beneficiary not being a Member but a mere financial interest owner. I’m not convinced that’s an issue in the context of an estate distribution.
One thing I do suggest to beneficiaries receiving property distributions to multiple beneficiaries is forming an LLC themselves, both to limit liability but also to sort out management issues. If they are a TIC anyone can force a sale (or division) with a partition action.
John J. Sullivan
Sent from my iPad
On Oct 27, 2022, at 10:20 AM, Eric Nelsen <Eric at sayrelawoffices.com<mailto:Eric at sayrelawoffices.com>> wrote:
This has been a very interesting tangent to me, concerning formation of an LLC by an Estate for purposes of passing property to multiple heirs. I have generally avoided doing that, because I wasn’t very sure about the full ramifications of doing so. For what it’s worth, here are the issues and dilemmas that have led me to not (yet) have an estate form an LLC for heirs, for purposes of transferring real property:
1. PR’s fiduciary duty is to settle and distribute the estate, and formation of a new entity doesn’t seem necessary for that. If the heirs want the PR to do that, fine—but best to get that in writing with a disclaimer that heirs received no legal advice from PR’s attorney. It still seems extraneous to estate administration to me.
2. If the Estate forms the LLC and is sole member, then it doesn’t need an Operating Agreement to define rights and obligations of members. If it does create an Operating Agreement, that’s a whole new conundrum of fiduciary liability: who is determining what those provisions should be? These are very significant questions. Member- or Manager-managed? Voting rights per capita or by percentage interest? Restrictions on transfer of interest? Buy out provisions? Seems to me it should be the heirs who address all these complicated issues, not the PR, which again suggests the PR should stay out of it.
3. So, assuming no Operating Agreement, the default rights and obligations under Ch. 25.15 RCW apply. Those default rights and obligations differ substantially from the rights and obligations of tenants in common, which is what the heirs have technically inherited. For example, members can individually make the entire company (and property) liable on a contract, RCW 25.15.151, whereas a tenant in common has no such right. Also, management of the LLC is by per capita majority vote, which again is nothing like the rights of tenants in common. And, the heir loses the right to partition because the property is technically not divided in interest. If all of that is what all of the heirs want, surely that’s fine—but who is giving each of them legal advice about the differences? Again I think the PR and the PR’s lawyer need clear disclaimers signed by each and every heir confirming that they each want this to happen and have sought independent legal advice and aren’t relying on the PR’s attorney for advice.
4. Still assuming no Operating Agreement: Under the default rules, the Estate as creator of the LLC is automatically a member. But any subsequent transfer of an interest does not include membership rights and only a “transferable interest,” which is a financial interest, can be transferred. RCW 25.15.006(21); RCW 25.15.246(1); RCW 25.15.251. How do these transferees become members? There is no member who can vote them in. One could fudge it by “reflecting their membership in the records” of the LLC, RCW 25.15.116(1)(b), but again this is the PR taking a step, and subjecting themselves to liability risk as a fiduciary, to deal with a legal issue that isn’t really about administration of the estate.
From the perspective of advising a PR, so far it has seemed better to me to avoid confusion about the PR’s fiduciary role, and to transfer the property to heirs as tenants in common and let them form the LLC and transfer the property in. It’s not that I think the LLC is a bad idea; I just think the PR is put in a difficult position and it’s awfully easy for the heirs to “rely” on the PR and the PR’s lawyer to iron out issues they really need to deal with on their own.
I’ve also thought about letting the heirs form the LLC and have them sign individual directives telling the PR to transfer their inherited real property interest into the LLC. But is there then a REETA problem? I would think the inheritance exemption would work, but technically the LLC is not an heir, so this might cause some question. Ultimately I think it’s fair and proper to use the inheritance exemption, but the unusual facts could cause the deed to get rejected, causing delay and wrangling with the Recorder’s office. Again, I’m looking to avoid any problems, so I’d rather the deed record clearly show the PR meeting their duty to transfer the interest to the specific heir; and then the heir can do what they wish with their inheritance and transfer it into an LLC if that’s the plan.
Sincerely,
Eric
Eric C. Nelsen
Sayre Law Offices, PLLC
1417 31st Ave South
Seattle WA 98144-3909
206-625-0092
eric at sayrelawoffices.com<mailto:eric at sayrelawoffices.com>
Covid-19 Update - All attorneys are working remotely during regular business hours and are available via email and by phone. Videoconferencing also is available. Signing of estate planning documents can be completed and will be handled on a case-by-case basis. Please direct mail and deliveries to the Seattle office.
From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> <wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com>> On Behalf Of John J. Sullivan, Esq.
Sent: Thursday, October 27, 2022 12:35 AM
To: 'WSBA Real Property Listserv' <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
Don’t forget that as long as the LLC is a partnership for federal income tax purposes, a contribution of real property to it by a Member ( especially a sole Member) is exempt from recognition of gain under Sec. 721 of the Code, and therefore the conveyance is exempt from the REET. WAC 458-61A-212.
I just finished a years long clean up of a multi-generational disregard of the Torrens System on a commercial property. I quieted title in the names of the estates of H&W. Previously I had the estates form a LLC (partnership) and contribute the first property in formation of the LLC in exchange for all of the Member Units. REET Affidavit claimed the exemption under Rule 212. Then I distributed the Member Units to their son, my client and the sole beneficiary, filing the entity REET return claiming the inheritance exemption under 458-61A-202.
Finally, when I at long last withdrew the second adjacent parcel from Torrens I had the two estates quitclaim it at the beneficiary Member’s instruction directly to the LLC, claiming the Rule 212 exemption again.
So far no problem. The county accepted the deed. On review I doubt the DOR will pick it for audit, since even if they make me jump through the two step hoop both steps remain exempt.
John J. Sullivan
From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> <wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com>> On Behalf Of Jeanne Dawes
Sent: Wednesday, October 26, 2022 5:31 PM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
Mark, The estate would be the sole member, until it distributed the membership interest to the heirs. The assets transferred to the LLC are still part of the decedent’s estate, which will be distributed to the heirs. I haven’t had to use this, but I think it should be possible. I can see where a PR may want to handle a distribution in this manner outside of saving a recording fee. If the property is problematic (environmental issues or the like), it may be beneficial for the heirs to receive an LLC membership interest as opposed to the real property itself to protect other property owned by the heirs. Or if there are heirs that do not get along, the PR can avoid an obstinate heir by creating the LLC and transferring the property to it. If I was going to structure this type of distribution I’d run it by DOR to get an opinion that the distribution from the estate is still considered an inheritance.
Jeanne
Jeanne J. Dawes
Attorney at Law
Gore & Grewe, P.S.
103 E. Indiana Avenue, Suite A
Spokane, WA 99207-2317
Voice: 509-326-7500
Fax: 509-326-7503
jjdawes at goregrewe.com<mailto:jjdawes at goregrewe.com>
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From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> On Behalf Of Mark Anderson
Sent: Wednesday, October 26, 2022 5:14 PM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
Yes, a probate estate can form an LLC and transfer the property into the name of the LLC. This conveyance would be exempt as a change in form or identity so long as the sole member of the LLC is the Estate itself. The probate estate is a different person from its collective heirs.
So now what? For the heirs to ultimately have a beneficial interest in the property, the Estate would then need to transfer its membership interests to the heirs (pro rata according to how they would have taken if they received the property directly from the Estate as a distribution). In this case, I’m not confident that there is any exemption on point to avoid excise on this transfer of a controlling interest in an LLC other than characterizing it as a gift. In any case, this still looks like two transactions.
Mark B. Anderson
ANDERSON LAW FIRM PLLC
821 Dock St Ste 209 PMB 4-12
Tacoma, Washington 98402
+1 253-327-1750
+1 253-327-1751 (fax)
marka at mbaesq.com<mailto:marka at mbaesq.com>
www.mbaesq.com<http://www.mbaesq.com/>
CONFIDENTIALITY NOTICE
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From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> <wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com>> On Behalf Of Jeanne Dawes
Sent: 10/26/2022 12:07 PM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
RCW 25.15.006 Definitions.
(13) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality or any other legal or commercial entity.
RCW 25.15.071<http://app.leg.wa.gov/RCW/default.aspx?cite=25.15.071>
Formation—Certificate of formation.
(1) In order to form a limited liability company, one or more persons must execute a certificate of formation. The certificate of formation must be delivered to the office of the secretary of state for filing in accordance with Article 2 of chapter 23.95<http://app.leg.wa.gov/RCW/default.aspx?cite=23.95> RCW and set forth:
Mark,
An estate can create an LLC, What basis is this not a mere change of form or identity?
Jeanne
Jeanne J. Dawes
Attorney at Law
Gore & Grewe, P.S.
103 E. Indiana Avenue, Suite A
Spokane, WA 99207-2317
Voice: 509-326-7500
Fax: 509-326-7503
jjdawes at goregrewe.com<mailto:jjdawes at goregrewe.com>
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From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> On Behalf Of Mark Anderson
Sent: Wednesday, October 26, 2022 11:48 AM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
Here is the response I just got from the King County recorder's office. Although I think they misunderstood the identity of the grantors and grantees in my situation (and as inartfully worded their response is), it is clear they want two transactions.
That is a 2 part transaction. Since it’ll first need to be transferred from the persons to the LLC then LLC to the probated estate. It will be rejected if its in one transaction saying the same thing I’ve mention which is that is a 2 part transaction. 2 different transactions and 2 different wac exemptions cannot be provided on 1 REETA and Deed.
As to Jeanne’s comment, there is a Controlling Interest Transfer Return (Form 84 0001Be) that is submitted to the Department of Revenue when an LLC (or other entity) conveys 50% or more of its beneficial interest.
Follow-up question: would a transfer from the probate estate directly to the LLC really be a mere change in a form or identity such that it is exempt from excise tax under WAC 458-618-211? I would not think that that exemption would cover that conveyance.
Mark B. Anderson
ANDERSON LAW FIRM PLLC
821 Dock St Ste 209 PMB 4-12
Tacoma, Washington 98402
+1 253-327-1750
+1 253-327-1751 (fax)
marka at mbaesq.com<mailto:marka at mbaesq.com>
www.mbaesq.com<http://www.mbaesq.com/>
CONFIDENTIALITY NOTICE
This transmission is confidential and is intended solely for the use of the individual named recipient. It may be protected by the attorney-client privilege, work product doctrine, or other confidentiality protection. If you are not the intended recipient, or the person responsible to deliver it to the intended recipient, be advised that any dissemination, distribution, or copying of this communication is prohibited. If you have received this transmission in error, please immediately notify the sender via e-mail or by telephone at (253) 327-1750 that you have received the message in error, and then delete it. Thank you.
From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> <wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com>> On Behalf Of Jeanne Dawes
Sent: 10/26/2022 10:57 AM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
I believe there is a special form to use when an LLC conveys 50% or more of its membership interest. There will not be a deed to record, and I believe the inheritance exemption will work on the form the LLC is to use to notify DOR of the conveyance. So on the deed from the estate to the estate created LLC it will just be one exemption the mere change of identity exemption.
Jeanne
Jeanne J. Dawes
Attorney at Law
Gore & Grewe, P.S.
103 E. Indiana Avenue, Suite A
Spokane, WA 99207-2317
Voice: 509-326-7500
Fax: 509-326-7503
jjdawes at goregrewe.com<mailto:jjdawes at goregrewe.com>
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From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> On Behalf Of michael westseattleattorney.com
Sent: Wednesday, October 26, 2022 10:31 AM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
In King, I had a REETA rejected with two exemptions ☹
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From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> <wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com>> on behalf of Jeanne Dawes <jjdawes at goregrewe.com<mailto:jjdawes at goregrewe.com>>
Sent: Wednesday, October 26, 2022 10:18 AM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: Re: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
I believe you can have the estate establish the LLC, then distribute the property to the LLC using the mere change of identity exemption, and then distribute membership interests to the heirs using the inheritance exemption.
Jeanne
Jeanne J. Dawes
Attorney at Law
Gore & Grewe, P.S.
103 E. Indiana Avenue, Suite A
Spokane, WA 99207-2317
Voice: 509-326-7500
Fax: 509-326-7503
jjdawes at goregrewe.com<mailto:jjdawes at goregrewe.com>
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INFORMATION CONTAINED IN THIS E-MAIL TRANSMISSION IS PRIVILEGED AND CONFIDENTIAL.
From: wsbarp-bounces at lists.wsbarppt.com<mailto:wsbarp-bounces at lists.wsbarppt.com> On Behalf Of Mark Anderson
Sent: Wednesday, October 26, 2022 9:58 AM
To: WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com<mailto:wsbarp at lists.wsbarppt.com>>
Subject: [WSBARP] Recording a Deed with Two Excise Tax Exemptions
Dear All:
I have posed this question to the King County Recorder and am still waiting for an answer. Because recording issues have been on your minds lately as a topic of discussion on this listserv, I thought I would run it by all of you.
A probate estate plans to make a distribution of a single piece of real property to the heirs. I am aware that a distribution to the heirs as tenants-in-common would be exempt from excise tax as an inheritance under WAC 458-61A-202.
Instead of distributing the property to the heirs as individuals, however, the heirs have requested that the property ultimately be conveyed into an LLC owned by all of the heirs in the same proration as they would have otherwise taken as tenants-in-common. I am aware that, so long as the owners have the same proportional interests in the property, conveyance from tenants-in-common into an LLC would be exempt from excise tax as a change in identity or form under WAC 458-618-211.
I am trying to do this as one transaction, i.e., one deed from the probate estate into the LLC. How would you annotate the exemption(s) on the real estate excise tax affidavit? Or should I just do this as two successive transactions?
Thanks in advance.
Mark B. Anderson
ANDERSON LAW FIRM PLLC
821 Dock St Ste 209 PMB 4-12
Tacoma, Washington 98402
+1 253-327-1750
+1 253-327-1751 (fax)
marka at mbaesq.com<mailto:marka at mbaesq.com>
www.mbaesq.com<http://www.mbaesq.com/>
CONFIDENTIALITY NOTICE
This transmission is confidential and is intended solely for the use of the individual named recipient. It may be protected by the attorney-client privilege, work product doctrine, or other confidentiality protection. If you are not the intended recipient, or the person responsible to deliver it to the intended recipient, be advised that any dissemination, distribution, or copying of this communication is prohibited. If you have received this transmission in error, please immediately notify the sender via e-mail or by telephone at (253) 327-1750 that you have received the message in error, and then delete it. Thank you.
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