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Day Pitney Boston News, June/July 2012

Publisher: Day Pitney Newsletter
June 27, 2012

Who Owns the Beach?

Article by Douglass C. Lawrence

So you have the perfect Massachusetts summer vacation planned. You have rented a seaside cottage and purchased all the necessary beach supplies. But before you load up the car with towels, beach chairs, umbrellas and coolers, stop and think about whether the beach you intend to visit is privately owned, how you are going to gain access, even if it isn't private, and where you are going to sit once you get there.

To fully understand whether a beach is public, a responsible Bay Stater would need to familiarize herself with such legal terms as "tideland" and "intertidal area," Public Trust Doctrine (on which ample authority exists because it dates back to Roman law) and the ever-exciting Colonial Ordinances of 1641-1647. For those readers seeking a scholarly article on such topics, STOP READING NOW. The summer is, after all, a time to have fun. But finding a beach in Massachusetts at which to do so might be harder than you thought.

Massachusetts is one of a handful of states that still allow virtually complete private ownership of the beach. And the people who own beach land are well aware of these property rights. A quick Google search of "Jim Belushi," "beach" and "trespass" underscores this conclusion. So when you stumble across a gorgeous stretch of Massachusetts beach and wonder why it's deserted, understand that using the beach might constitute trespassing on private property.

That said, the rights of landowners are not absolute when it comes to the beach. They have to share with the public, in narrowly defined circumstances, the area of the beach between the high-tide and low-tide marks. This area is often easy to spot because it is filled with seaweed, dead jellyfish and razor-sharp broken shells. Our courts call this space the "intertidal area."

In Massachusetts, landowners still own the intertidal area, but they must allow others access in three circumstances: fishing, fowling and navigation. As interpreted by our courts, you can access the intertidal areas--be sure to watch where you step--to fish, look for shellfish and hunt birds. And although you are free to "navigate" boats and watercraft in the intertidal zone (presumably at high tide), be sure to find deeper water before low tide.

One very large exception to these rules exists, however. Under the Public Trust Doctrine, the landowners do not actually own the seawater itself, even the water found in the intertidal zone. You can swim--or do whatever else you want--in this water, so long as you don't inadvertently touch the seafloor in the intertidal zone. Nor can you enter or exit the water via the beach or intertidal zones. Such contacts would, of course, constitute impermissible trespasses.

Despite these rules, Massachusetts offers numerous public-access beaches where you may find a tiny patch of sand to enjoy among the sun-worshiping masses.

Or you could just go to the beach in Rhode Island.

Vacation Homes: Top Estate Planning Considerations

Article by Tamara L. Busch

With the arrival of warm weather, you may be dreaming about upcoming travels to a beach, lake or mountainside home. Whether you are considering purchasing a vacation home and don't know how to take title in the property or you now own a vacation home and are thinking about giving it to your children, here are some estate planning issues to consider.

1. General Title Issues. After you've decided to buy a vacation home, you'll need to decide how to hold title to it. Should title be held in your own name? Or jointly with a spouse or other individuals? And if jointly, should it be held with rights of survivorship (meaning if one co-owner dies, the remaining co-owners automatically inherit the decedent's share) or as "tenants in common" (meaning on the death of one of the property owners, the decedent may name who inherits his or her share of the property in the decedent's will)?

There's no single correct answer. The right answer for you will depend on your specific circumstances, and most estate planners recommend clients consult with them about how to title property before finalizing a purchase. General considerations include the relationship between co-owners, whether the proportionate ownership interests of the co-owners will reflect the portion of the consideration each provided (if not, gift tax issues may arise) and whether each co-owner has sufficient other property to take advantage of his or her remaining federal or state estate tax exemption amounts.[1]

For spouses purchasing property jointly, the law of many states often defaults to a form of joint ownership with survivorship rights unless otherwise specified. An advantage of this "survivorship" ownership is that upon the death of the first spouse, the property immediately and automatically passes to the survivor without being subject to probate court proceedings. The primary disadvantage is that if property passes automatically to the surviving spouse, the decedent can't use this property to take advantage of his or her remaining estate tax exemption amounts.

2. If Your Vacation Home Is in a Different State. You'll want to be even more careful about how you hold title if your vacation home is in a different state (the "ancillary state") than your primary home (your "domiciliary state"). If at the time of your death you own real estate or tangible property (such as furniture) in an ancillary state, the executors of your will may be required to go through a second probate proceeding in such state with respect to such property (as well as a full probate proceeding in your domiciliary state).

While ancillary probate is not bad in and of itself, structuring your assets in a manner to avoid it may save time and expense in the administration of your estate. One manner by which to avoid ancillary probate was described above: holding property jointly with rights of survivorship. A second option that may permit the use of your remaining estate tax exemptions upon your death is to hold your vacation home, as well as its tangible contents, in trust. You can coordinate the trust's provisions with your will and other estate planning documents and may retain the power to change the trust's terms.

Remember that even if you make plans to avoid ancillary probate, your vacation home and its contents may be subject to estate tax in the ancillary state.

3. If Your Vacation Home Is in a Different Country. Owning real estate in a foreign country can be a great experience. Depending on the laws and practice of the specific country, however, you may either feel "at home" with the acquisition process, titling considerations and how the property passes at your death or you may feel you're dealing with rules from another planet, not just another country.

Because local laws vary significantly on recommended, tax-efficient manners to title and structure ownership of your foreign vacation home, it's essential to involve local experts. In addition to seeking advice on the purchase, you may also want to ask your local expert about any restrictions regarding the disposition of property upon your death and the country's estate or inheritance tax regime.

For example, some countries have "forced heirship" laws that do not permit you to choose who inherits local property and instead mandate that a surviving spouse and children inherit it in set percentages. In addition, outside of "common law" jurisdictions (generally, countries that trace their legal heritage to England), many countries do not recognize trusts. This means that if you leave your foreign vacation home to a trust for the benefit of your family, local law may disregard the trust and instead deem the property to pass to other beneficiaries under your will, or outright to the trust's beneficiaries, or via intestacy. Due to this, and because foreign laws governing wills are often very different from U.S. laws, it is often advisable to have a separate will prepared by a local lawyer to dispose of your foreign real estate.

Finally, if you are a U.S. citizen or resident, your worldwide assets are subject to U.S. estate tax. A foreign vacation home and its contents may also be subject to that country's estate or inheritance tax. Estate tax treaties and foreign tax credits may prevent double taxation.

4. If You Rent Your Vacation Home to Others. If you rent your vacation home, you should consider holding the property in a manner that may reduce your personal liability should a renter bring a claim against you, for example if a renter is injured at the vacation home.

Under the law of most states, the personal exposure of members or certain partners of limited liability companies (LLCs) or limited partnerships (LPs) is limited to their investment in the LLC or LP. In other words, if you hold your vacation home via such an entity and a renter brings a successful claim, to the extent not covered by insurance you may risk losing your vacation home, but your primary home and other investments should not be at risk.

Depending on how the entity holding your vacation home will be structured and whether there will be more than one owner of the entity, there may be income tax consequences you should discuss with your tax adviser.

5. Gifts of Vacation Homes in General. Similar considerations apply to gifts of vacation homes as to gifts of any other property. While the possibilities are too numerous to describe at length here, a few examples are that you can give your children (or whomever you wish to benefit) all of your vacation home or only partial interests in it; you can make outright gifts or gifts in trust; and as described below, you can place your home in an LLC or LP and then make gifts of those interests. If you are married, you may be able to split your gift with your spouse. Appreciation in the value of the home after the date of the gift should escape the estate tax.

The tax cost basis of the vacation home in the hands of the recipients will be the same as your basis, plus the amount of any gift tax paid. If you die owning the vacation home, under current law its basis would be stepped up to fair market value.

Similarities aside, there are special opportunities with respect to gifts of real property. If your domiciliary state imposes a gift tax (such as Connecticut) but you have a vacation home in a state that does not (such as Massachusetts), you may be able to make gifts of interests in your vacation home without using your domiciliary state gift tax exemption or generating a state-level taxable gift. Regardless of state gift tax considerations, remember that such gift would be subject to the federal gift tax regime (meaning you would either have to use any remaining federal gift tax exemption or pay gift tax). In addition, with gifts of real estate it may be possible to reduce the value of gifts of certain fractional interests in your vacation home by applying minority interest discounts.

6. Gifts to a Qualified Personal Residence Trust. A qualified personal residence trust (QPRT) is an irrevocable trust to which you transfer ownership of your vacation home; you retain the right to use your home for a term of years and, assuming you survive the term, pass your home to your children in equal shares (or in such alternative manner as you may decide before funding the QPRT). Under current law, you can retain the right to live in the home by renting it for a fair market rental following the end of the term. If you die before the end of the QPRT term, your interest in the property would revert to your estate and then pass in accordance with the terms of your will.

Generally, the taxable gift value of a personal residence transferred to a QPRT is not the fair market value of the property, but such value reduced by the value of your retained term of years. Your retained interest is calculated by looking at your age, the length of the term, the actuarial likelihood you'll survive the term and the applicable IRS-published interest rate for the month in which you create the QPRT. Using a QPRT allows you to obtain a reduction in the gift tax value of your vacation home and, accordingly, the gift tax itself in connection with its ultimate transfer to your children, albeit at the risk that the gift fails and your home is included in your estate at its fair market value should you die during the QPRT's term.

The rules about QPRTs and what property may be contributed to a QPRT are complex, and not all vacation homes would be suitable.

7. If Your Vacation Home May Stay in the Family for Multiple Generations. We often have special relationships with vacation homes and hope our children, grandchildren and generations beyond will continue to gather in and share the home in years to come. Much of the time, this may not be feasible as generations spread geographically, diverge economically or prefer to acquire a new vacation home. Other times, it's worth planning for the complexities of multigenerational joint ownership of property, leaving the decision to future generations.

One strategy is to transfer the vacation home to an LLC. The LLC's operating agreement could provide general mechanisms for managing and maintaining the property, and for more specific issues that come up such as scheduling use by family members and perhaps others, raising funds for improvements, withdrawing from the LLC, restricting transfers of LLC interests to family members only and requiring a supermajority or unanimous consent of the members to sell the property outside the family. Senior generations (be it you or, down the road, your children) may give, sell or leave LLC interests under their estate plans to their children and may retain control over the LLC's management by acting as its managers. There may be differing gift and estate consequences of each decision.

Another option to encourage the continued ownership and use of your vacation home by children and grandchildren is to leave a "vacation home endowment" (and perhaps but not necessarily the vacation home itself) to a trust for the benefit of your family. The endowment trust could make distributions to family members to help pay for the vacation home's property taxes, maintenance and improvements, and perhaps even travel to the home. It may, however, be difficult to create a large-enough endowment, especially considering that unless you allocate your generation-skipping transfer (GST) tax exemption to the endowment trust, the assets may be subject to GST tax at each generational level.

8. If You Would Rather Make Gifts of Cash Than of Your Vacation Home. Sometimes it just doesn't make sense to give your children your vacation home (even should you then rent it from them for fair market value so you can continue to use it), but you may feel pressure to do so to take advantage of your remaining federal gift tax exemption.

Instead of giving your vacation home to your children, you may be able to borrow from your bank using your vacation home as collateral and then make cash gifts to your children. With interest rates at historical lows, you may wish to increase your liquidity through such strategic use of credit.

9. If You're Interested in Preserving Your Property for Charitable or Historic Purposes. Under real estate law, you can perpetually preserve and protect your vacation home's natural features by negotiating and giving a "conservation easement" to a charity or governmental entity. Because doing so restricts the ability of future owners of your vacation home (as well as you) from significantly altering the property, such easements reduce its value and thereby may reduce the cost of transferring it to your children.

If an easement meets the IRS criteria for a qualified conservation easement (such as furthering the goal of preserving open space, a significant natural habitat for flora or fauna, or even a certified historic structure), in addition to potential transfer tax benefits, you may also be able to take an income tax deduction for the value of the easement given to charity.

The IRS recently began to subject conservation easements to increased scrutiny, in part to combat perceived abuse of the technique. Nevertheless, the importance of conserving appropriate property remains, as does favorable tax treatment for qualified conservation easements meeting the IRS requirements.


Please contact any member of the Individual Client group or your regular Day Pitney contact if you have any questions about any of the considerations and strategies described above.

IRS Circular 230 Notice: Any tax advice provided herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on any taxpayer.

[1] The current federal exemption amount is $5.12 million. In 2013, the federal estate tax exemption is scheduled to revert to $1 million unless there is a change in the law. Current state estate tax exemption amounts vary, with Massachusetts' and New York's being $1 million and Connecticut's $2 million.

A Day at the Beach or the Office?
Addressing Summer Dress Code Issues

Article by Erika D. Cagney

If employees' summer attire begins to resemble a day at the beach rather than a day at the office, it is likely time to remind employees of your dress code policy. Having a clearly delineated dress code policy in place and ensuring that your employees adhere to it is important for several reasons. Not only do dress code violations create a less-than-professional workplace environment, but they also can compromise employees' health and safety.

The primary dress code issues employers face in the summer months concern overly casual and revealing clothing such as flip-flops, shorts and tank tops. Aside from the fact that this revealing clothing leaves uncovered tattoos or body piercings that remain covered during winter months (often viewed by others as unprofessional and inappropriate for a place of work), it also creates safety hazards. Open-toed shoes increase the likelihood that employees may slip or fall. And improper attire, such as tank tops or shorts, can create dangerous working conditions for employees who work in a manufacturing setting.

Having reasonable attire and appearance guidelines in place is also essential to avoid the appearance of workplace discrimination. In drafting such guidelines, however, employers should be sensitive to potential discrimination claims that might arise once the policy is put into place. For instance, women have successfully challenged policies that require them to wear uniforms while men are allowed to wear "professional dress." Another potentially problematic policy is one that prohibits women from wearing pants but allows men to do so. Policies prohibiting particular hairstyles and those requiring men to be clean-shaven have been challenged as well. Employers also need to remember to accommodate employees' religious attire and appearance. For example, a policy prohibiting head coverings could be discriminatory if it does not allow for religious exceptions. Though employers typically must accommodate the dress code policy exception requests discussed above, if the employer can show the exception would create an undue hardship, it likely does not have to accommodate the request. Employers also must be careful not to retaliate against employees who request accommodations or who complain that the dress code infringes on their civil rights.

To ensure your company's dress code is followed by employees and properly enforced by managers and supervisors, it is vital that the policy be memorialized in writing and circulated companywide. If this crucial step is not taken, not only may employees have a less than clear understanding of the rules they are expected to follow, but managers and supervisors could be forced to make subjective judgment calls that could result in employees claiming they have been subject to discriminatory treatment.

Get to Know Our New Partner Michael P. Mullins

Did you always know you wanted to be a lawyer?

No. Immediately after college, I volunteered to teach inner-city seventh and eighth graders in Chicago. I started a chess program in the school that received national attention, most notably on CNN. The program also caught the attention of Michelle Obama, who at the time was the executive director of Public Allies Chicago, a not-for-profit that identifies and nurtures community leaders between the ages of 18 and 30.

Public Allies honored me with a Tomorrow's Leader Today award, and at the awards reception, I met Mrs. Obama. We stayed in touch after the reception, and I eventually took a position with Public Allies, where Barack Obama was a frequent speaker in the leadership training program. It was a great experience working with and becoming friendly with the Obamas, and it's thrilling to see what they have gone on to accomplish.

So what led to your decision to become a lawyer?

At Public Allies I worked closely with its board of directors, which was populated with attorneys from major law firms. I came to appreciate their rigorous analysis and problem-solving skills, and I decided to enroll in law school to get that training. After law school, I practiced in Chicago for a number of years but moved back to the Boston area nearly a decade ago because my wife and I decided we wanted to raise our children here.

Why did you choose to join Day Pitney?

I was attracted to the firm because of the established quality of its work and its recognized brand in the reinsurance and insurance coverage world. Since coming on board, I have witnessed firsthand the depth of the firm's practice, the skill of its attorneys and the overall collegiality that permeates not only the Boston office but also the firm in general.

How do you spend your time when you're not in the office?

My wife and I spend as much quality time as we can with our children, who are still young enough to want mom and dad around. During the summer there is a seemingly endless string of concerts, games, tournaments and other outings to attend. We live on the South Shore, which has a wide variety of beaches, parks and forests to explore, so that keeps us pretty busy.