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DEATH OF A RESIDENT
 QUESTION: Regarding
death
of a resident, what if the son has permission from the deceased to enter
the unit "any time"?
ANSWER:
Once the owner dies, control shifts to the estate. As a result, prior
authorizations are no longer valid. Only the estate’s executor can give new
access authorizations.
PAYING
TAXES FROM
RESERVES
 Last
week I wrote that taxes are operational expenses, not long-term reserve items,
and belong on the operational side of the budget. I received a number of
dissenting e-mails arguing it was okay to use reserve funds for taxes since
reserves generate most of an association's taxable income.
Despite their arguments, the law is quite clear. Except for
borrowing,
reserve funds cannot be used to pay taxes.
Civil Code 1365.5(f)(1)
["reserve accounts" means] Moneys that the association's board of directors
has identified for use to defray the future repair or replacement of, or
additions to, those major components that the association is obligated to
maintain.
Civil Code 1365.5(c)(1)
The board of directors shall not expend funds designated as reserve funds
for any purpose other than the repair, restoration, replacement, or
maintenance of, or litigation involving the repair, restoration,
replacement, or maintenance of, major components that the association is
obligated to repair, restore, replace, or maintain . . .
Unallocated Interest.
However, there is a solution for
those who want to pay taxes from their reserve account without using reserve
funds. Interest earned on reserve money
is not part of the reserve fund until classified as such. Accordingly, interest
accumulating in the account can be used to pay taxes up until it has been
allocated to the reserve fund.
Boards that want to pay taxes from the reserve account must be
careful to ensure that their reserve funding plan clearly allocates interest to reserves "net of taxes." The unallocated interest can then be (i)
transferred to operations for payment of taxes or (ii) paid directly to the IRS
from the reserve account.
It should be noted that most
associations avoid the problem by leaving all interest in the reserve account
and paying taxes from operations.
I want to thank Gayle Cagianut, Gary Porter,
and Steven Schonwit for their assistance. Contact information for their firms
can be found under "Accounting" in the
Service
Directory
RESERVE FOR
INSURANCE
DEDUCTIBLE
 QUESTION: Because of the new Fannie Mae
guidelines, our board wants to set up a fund for insurance deductibles. We have
a disagreement, some want to put it in the budget and others in reserves. Where
should the money go?
ANSWER:
Good question. Insurance deductibles don't fit comfortably into either category.
Operational Budget. Insurance
deductibles do not fit into operations because they're not an annual expense. The payout of a
deductible depends on the filing of insurance claims and associations can go
for years without a claim. I don't like putting it in the budget because it means the
deductible must be fully
funded in the 12-month budget cycle, which may put a strain on some budgets.
It also creates a surplus at the end of the year, assuming no claims are made. Nonprofit corporations
are supposed to break even, not run planned surpluses.
Reserves. Because deductible
payouts are periodic, they seem to fit into reserves. However, they don't meet the
definition of a reserve component. Their life-cycle is not predictable and may
not involve repair or replacement of a major common area component. Even so, the
reserve fund appears to be the better place for insurance deductibles--it allows
funding over 2 or 3 years and avoids annual budget surpluses.
Special thanks to Mark Poindexter for his
assistance with this question. Contact information for his firm can be found
under "Accounting" in the Service
Directory
RECOMMENDATION:
Associations should use CPAs who specialize in community associations. They are
more aware of the unique issues affecting associations, including tax considerations,
the interplay between operations and reserves, proper internal controls, financial
statement preparation, etc. For example, corporations in California pay an
annual franchise fee of $800 for the privilege of doing business in the State. However, CPAs who specialize in our industry know that many
associations qualify for an exemption from that annual fee. In some instances, the exemption may be
retroactive, resulting in a refund of prior payments.
Very truly yours,
Adrian Adams, Esq.
Adams Kessler PLC
Kessler’s
Condo Court: The
Case of the Fired Association Security Guard
An association retained an
outside vendor to provide security services. The
security company assigned one of its guards to work at
the association. The security company subsequently fired
the guard--who then sued the association,
its president and an association employee for
discrimination, harassment, retaliation and wrongful
discharge. Did the guard prevail on these claims?
Find
out how the court ruled. |
