Estate Planning: "I'll be back."–The Terminator

This guest post by fellow Stanford University alum Scott K. Anderson, Jr., CPA, CFP, EA.  He can be reached at, 949.200.7111.

“While pundits talk about the morality of the “death tax” there is a real world issue that gets glossed over.  As most people die with an estate and few people die with estates that might be subject to estate tax even with the new exemption, all estates have the same problem:  the basis of assets transferred to the beneficiary.

Basis is a tax term that means the value from which all gains or losses are measured.  Step-up-in-basis means that the basis of an asset is stepped up to the value of the asset as of the date of death.

Example:  Julie’s parents bought a house in 1980 for $100,000.  The house was worth $400,000 at the time of their death several years ago and is now worth $500,000 when Julie sold it in 2010.  Julie had been renting out the house since she inherited it.  Without a step-up-in-basis, Julie would be subject to $400,000 in capital gains tax ($500,000 less $100,000 basis).  With the step-up-in-basis, Julie would pay capital gains on $100,000 ($500,000 less $400,000).  Of course all this assumes that Julie can determine that the basis of the house was in fact $100,000 after her parents have passed.

Very few people keep timely and accurate records of the cost of their assets notwithstanding IRS requirements.  Without step-up-in-basis at the time of death, executors would have to spend inordinate amounts of time trying to determine the basis of assets being passed to beneficiaries.  The IRS would have a field day challenging the valuations of executors.  It would be another attorney and CPA full employment act (aka “jobs created”).  It is a heck of a lot easier (but still somewhat cumbersome) to get the value of assets at the time of a recent date of death.

So in the debate over the death tax, be careful what you wish for.  Complete elimination of the death tax might also do away with step-up-in-basis valuation.  That could prove to be the Nightmare Before Christmas.”

[My comments:  I am available to assist with recent date of death valuations.  Often, with multiple heirs, valuation can be a sticky subject depending on the family’s plans for the real estate.  For instance, one heir wants to buy the property and live there, while others would prefer to sell or be bought out.  I have dealt with such situations in discreet and fair fashion with great success.  In the event the heirs decide to sell the property, I am there to represent the family and get the highest and best price and terms.]

Death by Form 1099

This guest post by fellow Stanford University alum Scott K. Anderson, Jr., CPA, CFP, EA.  He can be reached at, 949.200.7111.

“The IRS posits that there is a substantial tax gap between taxes that are paid and taxes that should be paid.

To close that gap, for the tax years starting in 2011, Congress is requiring all persons who receive rental income to issue a Form 1099 for payments of $600 or more for rental property expenses.  It is not clear what happens if the property manager pays the bill for the owner–can the expense still be deducted if the property owner did not pay the bill directly and did not issue a Form 1099?….

….And if you forget to file the Form 1099s?  Penalities for non-filing increased in 2009 and have been increased again in 2010.  Depending on the lateness of the filing and the intention of the taxpayer, the penalities range from $30 to $250 per Form 1099 not filed–when the IRS finally catches up to you.”

My comments:  Many of my clients own and operate (or hire me or someone else to manage) rental property in coastal Orange County.  It is common practice to hire a variety of vendors to service, maintain, and repair these rental properties.  This new requirement as described by Scott Anderson, Jr. could create additional tax liability for said owners.  Any landlord should speak with his/her own tax advisor and consider both methods of payment and amounts paid to these vendors to come up with a plan that meets the new guidelines and protects their interests.

Politics: An Extremely Long Metaphor to Explain Mortgage Chaos

This story reprinted without permission and free of guilt from Rolling Stone Magazine.  Long, but worth it if you want to know some greater details about our real estate downturn and probable causes.–Grant Bixby


JANUARY 1, 2011

Happy New Year, America…

Have multiple relatives en route to my home this morning, but wanted to post a few thoughts on an interesting story that came out this week before I disappear into a weekend of overeating and meaningless NFL games.

The piece, which came out Thursday, is the Washington Post’s feature on MERS, the electronic mortgage registration company that is at the center of the foreclosure/mortgage bubble mess. MERS is the brainchild of the mortgage-lending industry and is essentially an effort at systematically evading taxes (more on that in a moment) and hiding information from homeowners in ways that enabled the Countrywides of the world to defraud investors and avoid legal consequences for same.

The idea behind MERS was to wipe away centuries of legal tradition that mandated the physical transfer of loan notes and ownership information. Whereas lenders once were required to physically register with county clerk offices every time a mortgage loan was extended or re-sold, MERS provided an “electronic registry” of mortgage notes where all such transfers were recorded in the wiry brain of a giant computer instead of on paper.

Instead of the individual banks or lenders registering with the counties each time a loan was sold or re-sold, MERS would handle the initial registration and then become the “nominal” note-holder. Then, each time the note was passed on, MERS would record the transaction in its computer — but no matter who the actual owner of the note was, MERS would remain the legally registered assignee of the note.

Imagine, say, a family of twelve, two elderly parents in Iowa and ten adult children scattered in different states all over the country. Mom and Dad on the farm own one Ford F-150 that they owe $300 a month on. Every month, the truck gets passed to a different family member, who in turn becomes responsible for the monthly payment. But no matter who has the car and whose turn it is to come up with the $300, the truck stays in Dad’s name and the money, in the end, comes to Ford Finance via Dad’s checking account.

Looking at this as an individual and unique case, you wouldn’t think there was much that was inherently wrong with this setup. Obviously the family arrangement violates the spirit of many laws and procedures — vehicle registration (from month to month, the true owner of the car is hidden from the state), credit application (Pops technically committed credit fraud if he got the car loan in his own name knowing the children would actually be paying), and taxes/fees (the state misses out on its registration fees every month, when the car is informally “sold” from child to child without the nominal paperwork fees being paid to the DMV of the state in question). But again, looking at this as an individual case, not many people would say any of these “violations” were major moral transgressions, if they were really moral transgressions at all. After all, this is family!

But once you take this setup and institutionalize it, and employ it everywhere on a vast scale, it becomes seriously problematic. This is particularly true if, say, Pop begins allowing his kids to “rent” the car out to non-family members, so long as they kick a small fee upstairs. Say it’s March and Pop gives the truck to son Jimmy in Toledo; in April Jimmy gives the truck to his buddy Rick in Akron, charging the $300 payment plus a $20 convenience fee. May: Jimmy gives the car to his girlfriend Trudy in Phoenix, telling her to wire $300 plus another $20 back to Pops in Iowa; she in turn lends the car to her occasional lesbian love interest Madison, who begins renting the car on a day-to-day basis in Tuba City as part of her family’s Painted Desert Resort and Tourism business, etc. etc. And she’s now kicking the fees back to Iowa.

Within a year Pop is buying fifty vehicles an hour and shuttling cars to new customers all over the country, collecting millions in fees every day; he becomes a billion-dollar corporate fixture, hiring the entire local Elks club to come with him to work as support staff.

So now, to take this already absurdly overwrought metaphor one final painful step further, there is a string of grisly homicides being committed on highways across America. Witnesses spot that original F-150 truck and the license plates at each of the murder scenes, but when cops come looking for the truck owner, they find old Pop in a wheelchair in Iowa, alibied on the night of every crime by forty-five fellow members of the Dubuque Elks. They drag Pop into the station to question him, but he won’t give up which of his boys did the crimes — hell, he doesn’t know, anyway.

This, roughly, is what MERS is. The functional effect of MERS is to create an obfuscatory wall between the homeowner and the actual owner of his mortgage loan. The problem with MERS is a paradox at the heart of the “ownership” question. On the one hand, MERS is the legal assignee of a lot of these mortgage notes. On the other hand, it’s not the “real” owner of the notes, in any way that could ever help you, or the state, or the investors in mortgage-backed securities. From the Post piece:

Some state courts agree. The Missouri court of appeals said in June 2009 that MERS lacked the authority to assign a mortgage from one service company to another. Because the transfer by MERS “had no force,” the court ruled, the owner of the loan “lacks a legally cognizable interest” and could not pursue the delinquent borrower.

The Kansas Supreme Court ruled in August 2009 that MERS did not have any interest in the underlying property of a bankrupt borrower whose home was auctioned – even though MERS was listed as the mortgagee. Moreover, the court said that the MERS transfer of the mortgage was invalid because the owner, Sovereign, had never recorded its interest in Ford County, Kan.

In short, the mortgage industry considers MERS owner enough to foreclose on you, but not owner enough to be sued, or reasoned with, or even to provide basic customer service. As noted in the above passage, the courts are beginning to disagree with the industry’s position here, but it’s a long process. In short this was the perfect ownership structure for a subprime industry geared toward massive fraud and predatory lending, in which mountains of dicey loans were issued factory-style and quickly sold off so that the original lenders could not be on the hook when they blew up.

It’s not a surprise that MERS was at least in part dreamed up by Angelo Mozilo of Countrywide. Again, from the Post piece:

The savings and loan crisis had just passed and the mortgage business was picking up again. At the time, an unconventional entrepreneur named Angelo Mozilo was on the MBA board. Eventually Mozilo would pay a $67.5 million to settle Securities and Exchange Commission allegations of fraud and insider trading. But back then Mozilo was one of the industry’s most admired executives, known for his inventiveness and technology investments at his firm Countrywide Financial, which in 1992 catapulted to first place among the nation’s mortgage originators.

Mozilo began brainstorming with a young MBA technology expert, Brian Hershkowitz, about ways to computerize and centralize the way the industry did business to take it to a new level.

“Angelo Mozilo loved to think about that,” Hershkowitz recalled. He was “the inspiration” for what would eventually become MERS.

Another detail here: for those of you wondering why so many localities are broke, here’s one small factor in the revenue drain. Counties typically charge a small fee for mortgage registration, roughly $30. But with MERS, just like with Pop and his pickup truck, you don’t need to pay the fee every time there’s an ownership transfer. Multiply that by 67 million mortgages and you’re talking about billions in lost fees for local governments (some estimates place the total at about $200 billion).

Outrageously, MERS actually marketed itself to its customers as a way to save money by avoiding the payment of legally-mandated registration fees. Check out this MERS brochure from 2007. It brags on the face page about its fee-avoiding qualities (“MINIMIZE RISK. SAVE MONEY. REDUCE PAPERWORK”) and inside the brochure, in addition to boasting about helping clients “Foreclose More Quickly,” it talks about how clients save money because MERS “eliminates the need to record assignments in the name of the Trustee.”

All of this adds up to a system that enabled the mortgage industry to avoid keeping any kind of proper paperwork on its frantic, coke-fueled selling and re-selling of mortgage-backed securities during the bubble, and to help the both the Countrywide-style subprime merchants and the big banks like Goldman and Chase pull off the mass sales of crappy loans as AAA-rated securities.

Anyway, the Post has some amazing factoids in it. I took particular note of this passage:

But critics say promises of transparency and of ironing out wrinkles in record-keeping haven’t panned out. [MERS], which tracks more than 60 percent of the country’s residential mortgages but whose parent company employs just 45 people in a Reston office building, is on the firing line now.

Emphasis mine there. Forty-five people, tracking 67 million mortgages. Does anyone wonder why the system is in chaos?

A New Year Brings New Changes at Bixby Residential

Welcome to 2011!

In this economic environment of uncertainty, only one thing is certain: real estate will remain fluid and unpredictable. At Bixby Residential we are pushing forward with optimism and preparedness.

You may have noticed a name change. I now operate under the business name Bixby Residential, as my residential sales business has grown to more than just me.  Long-time real estate partner Keith Randle and I have added two associate team members to better serve our clients. Additionally, we continue to build our concierge offerings and affiliate network of service providers who make our transactions run smoothly.

With the new Bixby Residential name comes a new logo, a part of which is an Australian Moreton Bay Fig tree. I was married under the shade of this tree and it is iconic of my family’s former rancho properties. Symbolically, the tree represents shelter, communal roots, and strength. Bixby Residential is proud of a history of integrity through service to our clients and community.

In 2011, Bixby Residential will deepen our relationships with clients by providing regular communications here at, which will automatically upload to Twitter and Facebook pages. Daily posts will cover everything from real estate trends to neighborhood spotlights to 365 Things To Do in (or near) Newport Beach. Check it out and subscribe to receive an e-mail link to new posts.

I look forward to connecting with you soon.

Grant Bixby