Best Practices for Gifts of Real Estate

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Best Practices for Gifts of Real Estate
Best Practices for Gifts
of Real Estate
April 29, 2015
Jay S. Tropea
This material is solely for the private use of Kanuga Conference and is not intended for public dissemination.
All the information contained in this presentation is as of date Indicated unless otherwise noted
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Why Consider Gifts of Real Estate
Baby Boomer Statistics
• 78 million born between 1946–1964*
• There are just over 40 million Americans age 65 and older, and they make up 13 percent of the population. By 2030, when all the baby boomers will have passed age 65,the over‐65 crowd will reach 20 percent of the population****
• Boomers control 67% of the country’s wealth, or $28 trillion*
• 1 out of every 4 Boomers owns more than 1 property**
• Boomers own 57% of all vacation and 58% of all rental properties in US**
• Real estate holdings make up 30%–40% of the assets of most families***
• Aging owners of real estate do not wish to burden their children with the taxes, maintenance, property management, and disposal of their real estate***
* US Census and Federal Reserve
** National Association of Realtors, 2005, Survey of Consumer Finances
*** Dennis Bidwell (2008, NCPG Survey), May 2009 Planned Giving Design Center
**** US News & World Reports, July 22, 2014
Source: SSGA‐Charitable Asset management
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How to Recognize a Good Prospect
• Donor Profile
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Age 65 and older
Own multiple properties often in multiple states
Managing properties is becoming more burdensome
Need for a considerable tax deduction (to offset sale of business or another property)
No heirs or the children are provided for in other ways and live far away
• Donor Motivation
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Support for the mission of the organization
Good fit with tax planning
They are ready to get out from under the ongoing responsibilities of ownership Want to resolve, once and for all, the future of a property so it won’t be debated by the family for the next 20 years
Source: 2005 Survey of Membership of Planned Giving Group of New England
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When A Real Estate Gift Arises
Good gifts may arise from talking about real estate holdings during
a visit with a donor
• Know your gift acceptance policy – Gift minimums
– Acceptable types of properties
– Acceptable types of gift structures
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Ask questions (use the list provided and add your own) Gather information (Site Review Checklist)
Assess information
Evaluate
Make recommendations for gift structure
Source: SSGA‐Charitable Asset management
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Questions to Ask
List of Questions to Ask
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What are donor’s objectives in making a gift? Does the donor have a highly appreciated property that has become a burden?
Is there a mortgage on the property? What is the current value of the property? Based on what information?
How is the title held? If jointly are they a married couple?
What is the environmental history of the property? Has the donor ever listed the property for sale? Any potential buyers? Donor must be careful of a Pre‐Arranged Sale
Source: SSGA‐Charitable Asset management
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Information to Gather
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Property Details: complete our Site Review Checklist with donor
Ask for an accounting of the costs of holding property
Visit property and take pictures
Information that must be provided by outside professionals
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Qualified appraisal
Legal counsel
Environmental Phase I Site Assessment Real estate market analysis by local real estate sales agent
Building inspection
Charity may want unbiased real estate market analysis
Source: SSGA‐Charitable Asset management
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Who Pays for What
Industry Standard
Donor pays for:
• Qualified Appraisal
• Donor’s legal counsel
• Expenses of the property before the sale
• Sales commission and legal costs of sale
• Phase I Environmental Site Assessment
• Various inspections by professionals if necessary
Charity pays for:
• Legal counsel
• Environmental Site Assessments
– Phase I
– Phase II
• Expenses of the property before the sale
Source: SSGA‐Charitable Asset management
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Gifts We Recommend and Why
Flip CRUT (Charitable Remainder Trust) with Donor as Trustee
• Donor as Trustee is responsible for all property expenses through the sale (and keeps the charity out of the line of title)
• Charity not responsible for any payments until after sale of property
• A Donor can avoid capital gains taxes by contributing long term capital gain property to the charity
• A potential financial planning advantage to donor because all proceeds from the sale of the property can be reinvested into a diversified, risk‐managed portfolio to generate income for donor • Donor receives charitable income tax deduction for present value of charity’s remainder interest • Property is no longer part of donor’s taxable estate
Flip CRUT with Multiple Charitable Remainder Arrangements
• Charity is named as one of Charitable Remaindermen
• Best Practice is to create Separate Trusts for each Remainderman
Diversification does not ensure a profit or guarantee against loss.
Source: SSGA‐Charitable Asset management
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Gifts to Evaluate Carefully and Why
Charitable Gift Annuities Funded with Real Estate
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Charity responsible for donor’s payments before property sells
Charity pays all expenses of property through the sale
If charity files in certain states, a cash infusion may be necessary to meet the reserve requirements
(Important to note: If you decide to fund a CGA with real estate, it’s best to do a deferred gift. You can reduce the rate, but you cannot reduce the value)
Retained Life Estates
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Not a planned gift but frequent inquiries
Maintenance of property
Donor can rent to third party (charity may have to manage tenant‐occupied building)
Donor may need to move to care facility
Source: SSGA‐Charitable Asset management
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Example 1: No Taxes Tess
Donor’s Profile
• Tess age 90
• Widow/no children
• 70 years in the real estate business
Donor’s Goals
• Avoid paying capital gains tax
• Does not want to self‐trustee
• Receive income (remember the trust will be a net income trust until the January following the flip event when it converts to a straight trust)
Property
• Apartment building worth $1.7 million
• Capital Gains Tax will be $300,00 if sold by donor
• High occupancy rate
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Potential Solution
Flip CRUT
• Self‐Dealing Issue
Charity is Trustee
• Charity hires property management company to handle all maintenance and bill paying
Rental Income
• Rental Income is an exception to Unrelated Business Tax Income (UBTI)
• Rental Income can be used to pay property management company (donor would contribute funds to pay balance)
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Value of Trust for No Taxes Tess
Donor’s stated value of property Appraisal of property (Initial Gift Value)
Actual Sale Price
$1,700,000
1,650,000
$1,550,000
Closing Statement Expenses
Sales Commission
Transfer Tax (80,000)
(2,000) (82,000) Actual Funding Value of Trust $1,468,000
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Example 2: Harried in Honolulu
Donor Profile
• Wants to fund a Flip CRUT with real estate
• Has a deadline of December 31 (six week time period)
• Has not instructed his attorney to begin legal work yet
Property
• Condo in Honolulu
• Worth approximately $300,000
• The condo is rented
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Potential Solution
Short Turn Around Time
• Tasks must be assigned Donor Task List:
• Get appraisal to determine charitable income tax deduction
• Instruct attorney to begin legal work for Trust document and Letter of Understanding Charity Task List:
• Complete Site Review Checklist
• Visit property with building inspector • Take pictures of property
• Contact local real estate agent to conduct a market analysis
CAM Real Estate Liaison Task List:
• Find reputable local real estate office
• Identify and talk to real estate agent with sales experience in the condo building • Request Broker’s Opinion of Value and Comparative Market Analysis (using Pending Sales)
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Value of Trust for Harried in Honolulu
Donor’s stated value of property Appraisal of property (Initial Gift Value)
Actual Sale Price
$300,000
280,000
$305,000
Closing Statement Expenses
Sales Commission
Transfer tax (19,162)
(305) (19,487) Contribution by Trustee to pay Trust bills
+$10,000
Actual Funding Value of Trust $ 295,533
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Example 3: Donny and Marie
Donor Profile
• Brother and sister
• Wish to donate jointly held property to their alma mater
• Want to establish a Flip CRUT
Property
• Held jointly by Brother and Sister
• Inherited home from parents
• Donor thinks property worth approximately $500,000
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Potential Solution
Revise the Property Title
• Only husband and wife can gift a property held jointly to a charitable remainder trust
• Donor’s attorney must revise the title before the property can be gifted
• Revised to reflect that brother and sister now have half interest in the property Two Separate Flip CRUTs
• Brother and sister will each have their own Flip CRUT established
• Trusts are funded with half the proceeds when the property is sold
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Value of Trust for Donnie and Marie
Donor’s stated value of property Appraisal of property (Initial Gift Value)
Actual Sale Price
$500,000
475,000
$400,000
Closing Statement Expenses
Sales commission
Transfer tax Total Expenses
Net Proceeds from sale
(20,000)
(495) (20,495) $379,505
Funding Value of Trust Donnie
$189,752.50
Funding Value of Trust Marie
$189,752.50
The information contained above is for illustrative purposes only.
Source: SSGA‐Charitable Asset management
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Points to be Mindful of When Funding Trust with Real Estate
Know if Donor has tried to sell the property previously
Pre‐arranged sale is not allowed
Trusteeship during pre‐flip period: Best if Donor is self‐trustee while trust holds the property Expenses of the property (e.g., insurance, taxes, maintenance, etc.) are the responsibility of the Donor prior to sale
• Carefully document the transaction in a Letter of Understanding before the deed is transferred to the trust
• Appraisal needs to be current and completed by a qualified appraiser
• Only a husband and wife can gift a property held jointly to a charitable trust
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Source: SSGA‐Charitable Asset management
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Appendix A: Important Disclosures
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Important Disclosures
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
We advise you seek your own legal and tax advice in connection with gift and planning matters. This communication is not intended or written to provide legal or tax advice. This communication also is not intended or written to be used, and cannot be used, for the purpose of avoiding tax‐related penalties. (IRS Circular 230 Notice)
The views expressed in this material are the views of Carolyn Stiles/Charitable Asset Management through the period ended December 31, 2014 and are subject to change based on market and other conditions. Investing involves risk including the risk of loss of principal.
United States: State Street Global Advisors, One Lincoln Street, Boston, MA 02111‐2900
Web: www.SSGA.com
© 2015 State Street Corporation — All Rights Reserved
Tracking No: CAM‐0898
Expiration Date: 04/30/2016
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Appendix B: Biography
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Biography
Jay S. Tropea
Jay Tropea is a Relationship Manager in the SSGA Charitable Asset Management Group responsible for the management of planned giving programs. Prior to joining State Street in 1998, he was a Senior Client Service Representative in the Shareholder Services Group of Grantham, Mayo Van Otterloo & Co., LLC. He has 23 years experience in financial and investment banking services.
Jay has assisted with a project to document a "best practices" guide for internal charitable gift processing related to charitable remainder unitrusts. He has presented to SSGA's charitable client constituents on the basics of planned gift vehicles.
Jay was awarded a BS in Management and an A.S. in Accountancy from Bentley University in 1987, and is an active member of the Alumni Association. He graduated from the New England School of Banking in June 2001. He is a recipient of the Charitable Asset Management Service Excellence Award in recognition of the outstanding client service he delivers to our clients.
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Click here and use the arrow to the right, or type a date
First and Last of Recipient
Business Name
Street Address
City, State and Zip Code
Legal Entity,
Legal Entity Line 2
Address Line 1
Address Line 2
Address Line 3
Country
T +1 000 000 0000
ssga.com
Dear [DONOR] «Title» «Last_Name»,
We are very pleased that you are considering funding a charitable remainder unitrust (CRT)
that will benefit you and the [CHARITY].
It is our understanding that the CRT will be funded with your real property located at
[address]. Because of your desire that you [or the CHARITY] act as Trustee(s) of the CRT, it is
important to us that you be aware of the following:
1.
The income from the CRT will be limited to the lesser of (1) the actual net income earned from
the property in the CRT or (2) a fixed percentage of [percent] of the CRT value, revalued annually,
until the real estate is sold; whereupon it will convert to a fixed percentage of [percent] of the
CRT’s net fair market value, valued annually. Therefore, the income received by you may increase
or decrease in direct proportion to the change in the net value of the assets in the CRT, as they
are valued annually.
2.
If in any year the actual net income were greater than the percentage amount, the Trustee(s)
would reinvest the excess thereby increasing the value of the CRT.
3.
After your lifetime, the property in the CRT will pass to [CHARITY] to [state purpose].
4.
Because the CRT is not being funded with liquid assets and there could be difficulty in marketing
the real estate, substantial time may pass before the property is sold and income payments may
be delayed.
5.
Since the net proceeds from the sale of the property may be significantly different from
the value now placed on the property, future income payments could vary from current
income projections.
6.
The Trustee(s) will have the sole legal right and fiduciary responsibility to determine the timing
and terms of the sale of the property.
7.
From the date the CRT is established to the date the property is sold, you will be responsible for
making contributions to the CRT to cover all property expenses including, but not limited to real
estate taxes, insurance costs, repairs, updated appraisal and maintenance.These additions will
serve to protect your potential income return from the CRT assets, and your ultimate gift.
8.
The Trustee(s) shall keep a separate financial account for the CRT, and all expenses and receipts
related to the CRT and its assets shall be accounted for using this account.
9.
You will be responsible for the costs to obtain a qualified appraisal used to substantiate your
charitable deduction and any closing costs associated with transferring your property to the
charitable trust.
10. The CRT, and payments from the CRT, are supported only by the net assets in the CRT and are not
“guaranteed” by the [CHARITY].
11. Prior to accepting the transfer of the property into the CRT, we require the following:
a)
b)
c)
d)
Title insurance policy or certified abstract of title to guarantee marketable title.
A “qualified” fair market value appraisal by a professional appraiser 60 days or less prior to
conveyance to CRT.
An environmental review, if the property is currently or at any time in the past, used for
commercial or industrial purposes, or at our discretion.
A satisfactory site inspection completed by:
(i) a professional home inspector or engineer and/or
(ii) qualified person completing Site Review Checklist
e) As to vacant land, confirmation that the Highest and Best Use of the land can be
realized in conformity with all applicable laws and regulations, such as zoning,
environmental restrictions, septic systems and water availability.
f) All mortgages on the property will be removed.
12. Prior to the gift, you will have reviewed the CRT documents and details of this gift transaction
with your own attorney, accountant or other advisors.
If this letter reflects our mutual understanding of the proposed charitable gift, would you kindly sign,
date and return the enclosed copy of this letter.
Sincerely,
[CHARITY]: ________________________________________________________________
Accepted [DONOR]: _________________________________________________________
Date: ______________________________________________________________________
Trust Real Estate
Site Review Checklist
Person Completing Report
Name
Phone
Owner
Donor/ Legal Title Holder
Phone
Address
Gift Property
Street
Unit #
City / Town
State / Zip
County
Country
Date of Purchase/Inheritance
Tax Cost Basis
Mortgage Balance
Terms
Lender
Est. Fair Market Value
Source
Land Area (acres or sq. ft.)
General Description
Has property been on the
market before?
State Street Global Advisors
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Yes
When?
No
For How Long?
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Real Estate Taxes & Insurance
Assessed Value
$
Tax Parcel ID#
Taxes
$
Insurance*
$
Insurance Company
Insurance Company Contact
*Insurance should be in the name of the Trust
Title
A title policy, or certified abstract of title sufficient for title insurance, will be required. Describe any known rights of way,
easements, restrictions, purchase options, etc. giving others rights in the property
Book / Page
Certificate of Title
Is a survey plan available?
Does the land have legal frontage or an easement right to cross on adjacent land for access?
If the land is undeveloped, what evidence exists to confirm that it can be built on?
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Building Condition
Check existing building components and note any unsatisfactory building conditions.
Foundation
Siding
Roof
Plumbing
Electrical
Heating System
Air Conditioning
Water Source
Sewage Disposal*
Swimming Pool
Fixtures w /
House
Garage
Security
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Poured Concrete
Clapboard
Asbestos/Tar
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Shingle
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Lead
Waste
Concrete Block
Brick
Field Stone
Stucco
Woodshake
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Sump Pump
Asbestos
Slate
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Vinyl
Metal
Aluminum
Tar & Gravel
Rubber
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Copper
Volts
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110
Amps
220
Hot Water*
Wood Stove
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60
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Iron
PVC
Circuit Breaker
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Fuse
100
200
Hot Air
Gas
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Steam*
Electric
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Propane
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Chandelier
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Solar
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Electric
Wood
Space Heater
Oil
Important: UST?
Stove
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Separate
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Window Units
Municipal
Municipal
In-ground
Burglar
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Central
Well
Septic System
Refrigerator
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Attached
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Above-ground
Fire
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Fenced
AC Unit
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Automatic Door
Cars
Low-heat Sensor
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1
Heat
2
Other
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Yes
No
3
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Access Code Special Key
* In Massachusetts, under Title V, a septic inspection and certification is required upon the transfer to or addition of new interested parties in the title. For residential property, the
necessity for a Phase I Environmental Audit shall be determined after reviewing the following responses. For property used currently or in the past for any commercial, industrial
or other non-residential purpose, a Phase I Environmental Audit by a professional engineer shall be performed.
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Environmental
Yes
No
Don’t Know
The property has prior or current use for industrial, commercial, agricultural,
manufacturing, waste disposal or other non-residential purpose
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Stressed vegetation, unusual bare spots, oil sheen’s, unusual odors in
standing water
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Underground oil tank(s) or unexplained outside vent pipe or unused pipes
in basement walls
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Large electric transformers (PCBs)
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Previous tests indicating radon
Lead paint (usually present in pre 1980 homes)
Asbestos insulation
Termites/carpenter ants/ other pests
Urea foam formaldehyde insulation (installed in 1970s)
Flood plain or coastal exposure
Earthquake potential
Extensive wetlands or drainage problems
Endangered plants or wildlife
Hazardous materials or debris stored on land
Known chemical or oil spill on land
Adjacent commercial or contaminated property
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If rental property, please complete the following:
Tenants
Provide a copy of lease(s) or summary of verbal understanding with tenant(s)
Accounting of Rental Payments
Units
One
Two
Three
Monthly Rent
Security Deposit
Last Month's Rent
Arrears
Annual Property Expenses for Escrow Account
Electricity
Heating/Hot Water
Water & Sewer
Landscaping
Condo Fees
Cleaning Fee
Trust Agency Fee (deposit)
Taxes and Insurance from page one
Other Expenses
Total Annual Expenses
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By
Date
Review and Approval
By
Date
© 2015 State Street Corporation. All Rights Reserved.
ID3082 0115
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