When you buy a home in an upscale neighborhood, you expect there to be guidelines that control what can be built. A savvy buyer will review the Covenants, Conditions and Restrictions. In most cases, there will also be a separate set of "Design Guidelines" that have been drafted by the Developer.

The distinction between the CC&Rs and the Design Guidelines is important.

The CC&Rs are recorded. To change the CC&Rs, it often requires at least a super-majority (67%) of the owners approval. This makes them more permanent and less likely to change. This protects the homeowner and Developer from buying into a neighborhood and then having it change.

The Design Guidelines are typically not recorded. They can usually be amended by the Board of Directors of the Homeowner's Association. This allows the Board of Directors to change the neighborhood based upon the Homeowner desire without getting a super-majority.

It is undisputed that the value of your home is tied in some respect to the value of the homes around your house. When a Realtor® does a market analysis, they will look at the "comps" in your neighborhood to determine the value of your property. The tax assessor does the same. The CC&Rs and Design Guidelines protect value by ensuring that all the homes in your neighborhood are of similar size and quality.

The protection of value is the reason that the distinction between the CC&Rs and Design Guidelines is important. In a recent case, the West Virginia Supreme Court was asked to determine whether the CC&Rs and Design Guidelines were the same or separate documents.¹

In the case, a homeowner sued the developer and another lot owner. The lot owner wanted to build townhomes of approximately 800 square feet. The Design Guidelines provided that homes must be a minimum of 1,700 square feet. The homeowner asserted the value of all the lots in the neighborhood would be lowered if the smaller townhomes were allowed.

In Court, the homeowner asked for a permanent ban on all townhomes that were not at least 1,700 square feet. After the lawsuit started, the Developer (which appointed all of the Directors of the Homeowner's Association) amended the Design Guidelines to allow the construction of the townhomes.

The homeowner argued that the amendment of the Design Guidelines was akin to an amendment of the CC&Rs and any amendment would require a super-majority vote. Both the trial court and the West Virginia Supreme Court disagreed with the homeowner.

In its decision, the West Virginia Supreme Court found that the CC&Rs and the Design Guidelines were separate documents with separate amendment procedures. The CC&Rs required a super-majority vote. The Design Guidelines could be amended by the Board of Directors of the Homeowner's Association without a vote of the homeowners.

Since the square footage requirement was in the Design Guidelines, the change to allow the smaller townhomes was properly adopted. The homeowner lost the case.

When real estate values fall, we are seeing more and more Developers and Homeowner's Associations changing the standards of construction in neighborhoods. This is primarily done to meet buyer desires.

For the Homeowner and Developer alike, it is important to understand the distinction between the CC&Rs and the Design Guidelines. The CC&Rs are "set in stone" by the fact it takes a super-majority in most cases to change them. The Design Guidelines can be changed much more easily.

Whether a neighborhood will look the same in 1, 5, or 10 years often depends on whether the standards are in the CC&Rs or Design Guidelines. By the same token, the value of the property may also be tied to the distinction between the CC&Rs and the Design Guidelines.

¹Foster v. Orchard Development Company, LLC, 227 W. Va. 119, 705 S.E. 2d 816 (2010).

Many higher net-worth individuals and their advisors were pleasantly surprised when Congress and the Obama Administration agreed in December - as part of their efforts to update the federal estate tax - to increase the gift tax exemption from $1 million to $5 million.

The change creates some valuable planning opportunities, but those opportunities do have to be approached with some caution.

By way of background, at the federal level, there is both a gift tax (imposed on large gifts made during lifetime) and an estate tax (imposed on estates at death), and each tax has an amount that is exempt from taxation (previously $1 million for gifts and $3.5 million for estates).

Both exemptions have now been increased to $5 million. Any exemption used for a gift is subtracted from the exemption available at death, so at first blush it would appear that there is no tax advantage to making a large gift. However, gifts get any post-gift income and appreciation out of the taxable estate. In addition, since Washington state has no gift tax but does have an estate tax on estates over $2 million, gifts escape taxation by the state altogether. However, what Congress has given us with one hand, it may be taking away with the other. Unfortunately, these tax breaks last only two years, and will "sunset" on December 31, 2012.

The new tax act merely delays the sunset provisions enacted ten years ago for an additional two years. For years, practitioners have complained that the sunset provision had all kinds of unintended and bizarre consequences, but Congress ignored those problems when it enacted the new legislation.

One of those unintended consequences has been given the name "clawback" because it could result in a tax-free gift made this year being taxed when the gift donor dies after the sunset. Many of the best minds in the business disagree as to whether a literal interpretation of the sunset provision results in such clawback, but all agree that it is not what Congress intended. Whether Congress will fix the problem remains to be seen.

If clawback does occur, many gift donors will lose the advantage of the increased exemption, but these donors will be no worse off from a federal estate and gift tax point of view than if they had done nothing. And the gifted assets will escape the Washington estate tax (which has a $2 million individual exemption and $4 million per couple) since Washington has no gift tax.

There may, however, be an adverse capital gains tax impact. The recipient of a gift gets what is referred to as "carry over basis," meaning the income tax basis in the hands of the recipient is the same as it was in the hands of the gift donor.

The recipient of a bequest from an estate, on the other hand, receives an adjustment in basis to the asset's fair market value on the date of death (usually referred to as a "step-up in basis," but it can be a step down if an asset has gone down in value).

In most cases the estate tax savings are substantially greater than the increase in capital gains tax, but if the estate avoids estate tax (because Congress increases the exemption further or perhaps even repeals the tax) or if the gift is subject to estate tax anyway (because of clawback), there will be no estate tax savings to outweigh the increased capital gains tax.

In addition to estate and gift taxes, there is a generation skipping transfer (GST) tax to be considered. The GST tax is intended to thwart the efforts of high net worth families to avoid the once-a-generation estate tax by passing wealth down to grandchildren and even younger generations. There is an exemption from GST tax, and that too has been increased to $5 million ($10 million for a married couple).

Generation skipping transfers are usually made by contributing assets to a multi-generational trust and allocating GST exemption (whether the transfer is the result of a lifetime gift or a bequest at death) to the trust. If every transfer to such a trust is fully covered by a GST exemption, the trust remains forever free of GST and estate tax. Due to a quirk in the way the laws are written, the "clawback" concern described above does not appear to apply to the GST tax.

Families who would benefit from multigenerational gifts free from estate and gift tax should seriously consider making such gifts soon, since the increase in GST exemption to $5 million is scheduled to end after 2012.

The decision on whether to make a substantial gift can be difficult enough from a nontax point of view. Given the additional complexities and uncertainty in the tax law, it is a decision that is best made only with the assistance of a qualified tax professional.

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The recent economic downturn has had a dramatic impact on the real estate market, both nationally and locally. Many people are considering seizing the opportunity to invest in real estate while the prices are low and tax credits are available. While most people understand the importance of a physical inspection of the property prior to purchasing, a large percentage of purchasers do not properly inspect title to the property or understand the importance of obtaining an owner's policy of title insurance (note: a discussion of the differences between owner's and lender's policies and standard and extended coverage are beyond the scope of this article). The worst case scenario is that a purchaser could lose the property and money as a result of a title matter. The good news is that purchasers have the ability to protect their investments by performing adequate title review and obtaining a policy of title insurance. The following is a brief explanation of the title review process and title insurance along with some practical tips and suggestions to help purchasers with this important due diligence work.

In Satomi Owners Association v. Satomi, LLC (2009), the Washington Supreme Court was faced with an important constitutional issue as to whether the Federal Arbitration Act preempts the judicial enforcement provision of the Washington Condominium Act.

The Spokane Home Builders Association has assembled a group of well-known residential construction firms to build six green residences to display at the 2010 Spokane Certified Built Green Home Show. The green builders involved in the home show include George White Homes, Brent Peterson Homes, and Greenstone Homes.