Condo building’s insurance won’t cover all damage

Unit owners should know difference between master policy and HO-6

DEAR BENNY: If damage to an individual unit is from a common-area element and was caused by negligence, and the condo documents as I understand them state that the damage to the unit involved is the responsibility of the condominium owners association, should that not then be covered by the master policy? Also, what is an HO-6 policy? –Lois

DEAR LOIS: If a unit is damaged as a result of a common-element problem, such as a roof leak or a brick-pointing problem, then the association is responsible regardless of negligence.

For example, let’s say a common-element pipe breaks because of old age and causes damage to individual units. The association’s first obligation is to notify the master insurance carrier of the problem and then fix the problem. Let the insurance company adjuster determine if there is coverage, and if so, to what extent.

Typically, the master policy will pay to repair the walls, floors and ceiling of a unit that was damaged from a common element. However, betterments, which are additions made since the unit was created, such as new kitchen or bathroom cabinets, or new parquet flooring, are often excluded. You have to carefully review the terms and conditions of the master policy.

An HO-6 policy is commonly called a "condominium owner’s policy." According to Virginia-based USI Insurance Services LLC, the HO-6 policy will provide such coverage for personal property, liability, loss of use, and medical coverage. However, unlike a tenant’s policy, it will also include "dwelling" coverage in an amount selected by the unit owner. Betterments, if excluded from the master policy, will be included in the HO-6.

You can obtain more information on the Internet merely by typing in "HO-6" into your favorite search engine.

DEAR BENNY: I have a question about a recent article in which you discussed the tax implications of gifting a home. You wrote, "If you die and leave the house to someone, that person gets the stepped-up basis. …" My question is: Wouldn’t the brother to whom the house was gifted have to pay an inheritance tax, (death tax) if the property was not in a trust? –Don

DEAR DON: Some states impose inheritance tax on the value of assets that a decedent leaves to others.

For example, Maryland imposes an inheritance tax on the value of assets left by the decedent to anyone but a close relative. Property left to a brother is exempt. Generally, the inheritance tax is paid by the estate, but would "follow" the property, if not paid by the estate.

So, for example, if a niece or nephew receives an interest in joint property on account of the owner/uncle’s death, and there is no estate open, the niece or nephew would have to pay inheritance tax on the receipt of the property.

By contrast, there is no inheritance tax in the District of Columbia.

So the answer depends on what state you are in. You would have to discuss your individual situation with your own financial adviser.

Note: "Death tax" usually refers to estate tax, which also varies state by state. For example, Maryland has both an estate tax (assets over $1 million) and an inheritance tax. Virginia presently imposes neither inheritance tax nor estate tax.

And, of course, there is also a federal estate tax with current exemption of $5.12 million. Stay tuned to the political weather forecasts; this may change.

DEAR BENNY: My wife and I are purchasing a two-bedroom condo. We are paying cash, and intend to have her parents live there for a year, and then we will likely turn it into a rental. Our current single-family home is in the name of my wife’s and my revocable living trust.

We are trying to determine what the best options are with our rental real estate. We are both professionals, and have worries about liability.

1) Should we purchase the condo in the names of our revocable trusts, and go for the largest liability policy available for the property, i.e., $1 million (or is more recommended)?

2) Should we form a real estate limited liability company (LLC) to hold the property? And if so, who should be the members: my wife and myself as the members, or create the LLC with the trusts as the members?

I know that with a real estate LLC we would need to have a tax ID, business credit card, business checking account, and to run the LLC as a business separate from our personal finances.

3) Are there tax considerations we should worry about if we put the condo in the name of the revocable living trusts or LLC? (For example, would that set the basis for the property value and prevent our children from getting the benefit of a new basis upon our death? We are in our early 40s with a couple of kids). –Bret

DEAR BRET: You have asked some very serious questions that require a thorough evaluation of your financial situation. I can provide only some basic suggestions, but you really need to discuss your situation with your own financial and legal counselors.

1) Generally it’s a good idea to put rental real estate into a LLC for liability purposes. Membership interests can then be titled in the name of the trustees of your revocable trust. If for estate planning or financing or other reasons it is desirable to title the property in the name of the trust, then a large liability policy would be the way to go. Other assets in the trust (and possibly those outside the trust titled in the names of the grantors, but this is a matter of state law, and I do not believe entirely settled) could be subject to a judgment against trustees.

2) Whether you and your wife individually — or the trustees of the trust — should be members of the LLC holding the rental property would depend on more facts than you have provided. There are issues with successor trustees and other issues that could come into play if the trustees are listed as the members, and I can’t think of any great advantage to doing it that way.

3) Generally, the trust or the LLC would have the same basis in the property as the grantors at the time of the transfer. A step up in basis in the property would happen upon the death of the trust grantor or LLC member, so that the trust property or membership interest in the hands of the beneficiary would have a stepped-up basis. (This presumes we are talking about a revocable living trust; it could be different with an irrevocable trust.)

But please talk with your own financial and legal advisers. I cannot and do not provide specific legal or financial advice.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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