Colorado Real Estate Transactions – What Rights are Included?

Posted on by katemley

Colorado S.B. 14-009: Real Estate Transactions—What Rights are Included?

For years, landowners whose estates contain energy producing minerals have been dividing their estates into a separate surface estate and subterranean estate or “Mineral Estate.” In such areas, subsurface rights to minerals such as oil and natural gas are often severed from the surface estate, vesting ownership in multiple parties. These severances are different than others such as a wind energy right in that ownership of the mineral estate is severable from the surface estate, giving the owner of the mineral estate an exclusive right to the subterranean portion of the estate. Common ownership schemes for such an operation include the following:

  1. The owner of the undivided estate leases the mineral estate to an oil and gas company.
  2. The owner of the undivided estate sells the mineral estate to a party who then leases that mineral estate to an oil and gas company.
  3. The owner of the undivided estate sells the mineral estate to the oil and gas company.

Generally, a separate surface use agreement regulates the interaction between the owner of the surface estate, owner of the mineral estate, and leasee of the mineral estate. Such agreements commonly include conditions under which the mineral leaseholder may access the surface estate in order to access the mineral estate and whether or not compensation will be required to the surface estate owner.

Recently, with the growth of unconventional drilling technologies such as hydraulic fracturing, more landholders find themselves on land with drilling potential. Thus, more landowners are severing mineral rights to property in more densely populated and developed areas, which has the potential of creating uncertainty for a purchaser of real property.

To address this issue, the Colorado State Legislature recently passed Senate Bill 14-009. The Bill adds an additional disclosure requirement to the list of disclosures already required for conveyances of real property. This new disclosure requires a seller to provide information to a buyer regarding any potential split in ownership between the land and mineral estates. More specifically, in each contract for the sale of real property the seller must disclose the following:

  1. That the surface and mineral estate may be owned separately;
  2. Transfer of the surface estate may not include the mineral estate;
  3. Third parties may own or lease interests in oil, gas, or other minerals under the surface and may enter and use the surface estate to access the mineral estate (The use of the surface estate to access the mineral estate may be governed by a separate surface use agreement recorded with the county clerk and recorder); and
  4. The types of oil and gas activities that may occur on or adjacent to the property.

The above disclosure is intended to protect the purchaser of real property, by providing them with the information necessary to understand exactly what property rights they are acquiring when purchasing a parcel of land. By January 1, 2016 the Real Estate Commission is required to promulgate a rule regarding the above land disclosure. At that time all land subject to the real estate commission’s jurisdiction will be subject to the commission’s rule regarding disclosure. Any land not under the Real Estate Commission’s jurisdiction, will be required beginning January 1, 2016 to include, in bold typed face, a disclosure statement in any sale for real property in substantially the same form as the statutory language provided in the bill.

Missouri Legislature Overrides Vetoes on Taxpayer Friendly Bills

Posted on by katemley

Missouri Legislature Overrides Vetoes on Taxpayer Friendly Bills: An Overview of Senate Bills 829 & 727

This past week the Missouri Legislature voted to override the governor’s veto on several bills including Senate Bill 829 regarding the burden of proof in taxpayer liability cases, and Senate Bill 727 regarding sales taxes for farmer’s markets. Both of these bills are effective retroactively beginning August 28, 2014.

Senate Bill 829 repeals and replaces section 136.300 of the Missouri Revised Statutes, amending the burden of proof requirements in taxpayer liability cases. Although Senate Bill 829 was signed by both the house and senate earlier this year, it was vetoed by Governor Jay Nixon on June 11. While the governor’s veto was in place, the Department of Revenue (DOR) only had the burden of proof in tax liability disputes if the taxpayer met certain threshold requirements. Such requirements included whether (1) the taxpayer was a partnership, corporation, or trust, (2) the taxpayer’s net worth did not exceed $7 million and (3) the taxpayer had less than 500 employees.

On September 10 the legislature overturned the governor’s veto, enacting Senate Bill 829. The bill replaces the threshold requirements mentioned above, and places the burden of proof on the DOR with respect to any factual issue relevant to ascertaining the liability of the taxpayer as long as the taxpayer has (1) produced evidence that shows that there is a reasonable dispute with respect to the issue and (2) has adequate records of its transactions and provides the DOR reasonable access to the records. Now because the burden of proof is on DOR, they have to prove liability for claims stating that a taxpayer owes additional taxes (this act includes issues regarding the applicability of an exemption but excludes issues regarding the applicability of any tax credit). In addition, by placing the burden of proof on DOR, the bill mirrors current Internal Revenue Service procedure concerning federal tax liability. Overall the bill is favorable to the taxpayer and creates consistency between the state and federal tax liability procedures.

Senate Bill 727 amends Chapters 144 and 208 of the Missouri Revised Statutes by adding three new sections, the first of which, section 144.527, is related to sales taxes at farmer’s markets.

Section 144.527, specifically exempts “all sales of farm products sold at farmer’s markets” from sales and use taxes as defined in Chapter 144. In addition, the section states that in order to qualify as a “farmer’s market,” the individual farmer, group of farmers, nonprofit, or cooperative must (1) consistently occupy a given site throughout the season, (2) operate as a “common marketplace” for farmers to sell farm products directly to consumers, and (3) be a marketplace where the sole intent and purpose of the farmers is to generate a portion of their household income. While section 144.527 limits farmer’s markets to the “sale of farm products,” it defines “farm products” very broadly so as to encompass almost any type of food that one might find at a farmer’s market (including baked goods made with farm products). However, the term “farm products” would exclude any third party goods or other non-farm product goods that a farmer may want to sell. Lastly, the exemption does not apply to persons or entities with total annual sales of $25,000 or more from farmer’s markets participating in the tax exempt program. 

If you have any questions regarding how these bills may affect your tax matter or farmer’s market, please feel free to contact our office.

Changes to the Colorado Probate Code

Posted on by katemley

H.B. 14-1322: Changes to the Colorado Probate Code

The Colorado General Assembly recently passed several changes to the Colorado Probate Code, which became effective August 6 of this year. In particular, House Bill 14-1322 made changes to the administration of revocable trusts. These changes include the expansion of default rules governing trust revocation and the enumeration of powers and duties afforded to certain fiduciaries acting under the terms of the trust.  

Before House Bill 14-1322, a trust could be revoked by any method expressing the “clear and convincing” intent of the trust creator (“settlor”) to revoke the trust, or if a method was expressly mentioned in the trust, revocation could be accomplished by such a method. Clear and convincing intent also included any revocation in a later drafted will or codicil that expressly referred to the revocable trust or which specifically devised property that would have otherwise passed through the trust. 

With the enactment of House Bill 14-1322, the code now requires settlors to use specific language to signal that a method of revocation is meant to be exclusive. More specifically, a trust must include the terms “sole” or “only” when referring to a method of revocation, otherwise the trust may be revoked by any other method manifesting “clear and convincing” evidence of the settlor’s intent to revoke. This change to the revocation procedure provides for a slightly higher burden on the settlor who wishes to specify an exclusive method of revocation, but also reaffirms the importance of the settlor’s intent when determining whether or not revocation is valid.

House Bill 14-1322 also adopts the statutory concepts of “trust advisors” and “directed trustees” and adds a non-exhaustive list of duties and powers applicable to directed trustees and trust advisors. A directed trustee is a person who is named in the trust as trustee, but whose actions are subject to the direction of a named fiduciary who is in charge of investment decisions on behalf of the trust. Often this named fiduciary is a trust advisor. The trust advisor will assist in the management and investment of trust property. The bill also defines the term “excluded trustees.” An excluded trustee is simply a directed trustee who, under the terms of the trust, must follow the direction of a trust advisor whereas some directed trustees have discretion over whether or not to follow the advice of the trust advisor.  

Before this Bill was passed, the Colorado Probate Code provided a set of specific and general powers in Title 15, Article 1, Part 8 of the Colorado Probate Code, which applied to all persons acting in a fiduciary capacity and which remains applicable after House Bill 14-1322. The provisions in House Bill 14-1322 allow a settlor to establish a trustee-beneficiary relationship with trust advisors, affording the trust advisor the ability to exercise the powers generally afforded to trustees and other fiduciaries. House Bill 14-1322 also imposes particular duties on trust advisors. For example, the bill explicitly states that the decisions of a trust advisor are subject to the Colorado “Uniform Prudent Investor Act.” The Bill also creates reciprocal duties among the trustee and trustee advisor, which require each to keep the other informed about the administration of the trust.

Overall, House Bill 14-1322 made several changes to the Colorado Probate Code, but for the most part they seem to clarify administrative procedures and fiduciary duties of individuals acting under a trust. If you have any questions about how these changes might affect your estate planning documents, please feel free to contact our office.

Anticipating a shortfall on your 2013 tax return?

Posted on by katemley

Haven’t seen your CPA since you filed your tax return in early 2013?  Paid the minimum in estimated taxes to avoid being penalized by the IRS? Made approximately the same amount of money in 2012 as 2013? You may have a problem – a tax debt problem. Don’t panic, review all your options before taking drastic action to pay that tax bill.

So what happened? A lot. 2013 brings with it many tax increases for those in higher income tax brackets.  Individuals earning over $250,000 and couples earning over $300,000 will start to lose their itemized deductions. Individuals earning over $400,000 and couples over $450,000 hit the new 39.6% top marginal tax rate.  Additionally, they are subjected to the 3.8% medicare surtax on investment income.  Finally, they lose the personal exemption of $3,900 this year.  These quickly add up.  Capital gains rates have taken a “bump” too for those earning more than $400,000 as a single person and over $450,000 as a couple, from 15% to 20%. 

These new changes may cause some to be surprised when they pick up their tax returns.  Taxpayers who have owed little or none before may find themselves in a situation where they don’t have liquid cash to simply write a check the U.S. Treasury. If you don’t have the cash, the last thing you want to do is take action that increases your 2014 tax bill.  In other words, you wouldn’t want to take an early withdrawal from your IRA or 401(k).  These withdrawals could cause you to incur both taxes and penalties. Further, you want to avoid a cash out of non-retirement assets that drive up your capital gains taxes or cause you to incur other ordinary income tax consequences. 

Perhaps you have access to a line of credit to pay your taxes – either secured or unsecured – such as a home equity loan or line of credit through a bank card. These could carry hefty closing costs if you are trying to establish them for the purpose of accessing cash to pay the taxes. And, home equity loans on average carry a 6% interest rate at this time.  Other lines of credit could carry interest rates in the double digits. A problem with using the line of credit, especially if you don’t have it established, is that it could take time to obtain the cash.  Delay in paying the tax bill could cause further penalties and interest.

One option that you can consider, if you need time, is asking the IRS for a “full pay delay.” It is not uncommon for the IRS to place a 120 day hold on collection action while you acquire funds.  Another option is to establish a payment agreement directly with the IRS.  In many cases, the payment agreement can be established without full financial disclosure and without the filing of a tax lien.  The interest rate at the IRS is actually pretty low, currently about 3%.  Additionally, penalties for failure to full pay your tax bill will accrue.  Regardless, this is another viable option that may very well be your cheapest overall option.

When analyzing this type of situation, regardless of what option the taxpayer chooses to resolve the debt, the taxpayer must plan for 2014 current taxes.  This will be necessary to avoid a similar shortfall like the one in 2013.  So, from a cash-flow perspective, the taxpayer will have to balance some mechanism to retire the 2013 taxes while not creating a new balance for 2014. 

If a taxpayer has a $25,000 shortfall for 2013, that will likely also be the case for 2014.  As such, an increase of greater than $2,000 per month in estimated taxes will be required to close the gap.  This type of foresight is necessary when looking at options to deal with the 2013 debt.

If you would like more assistance with resolving your 2013 tax balances and planning for 2014, please don’t hesitate to contact our office.