Real estate excluded from living trust causes trouble

Trustee seeking sale encounters legal roadblock
By: Robert J. Bruss: Inman News
DEAR BOB: I enjoy your articles, but now I need your help. My brother passed away, leaving both a living trust and a will. His trust named me trustee of his estate and assets. No probate was needed to distribute the living-trust property. However, the living trust did not say he owned 10 acres of vacant land near San Bernardino, Calif. My attorney advises not to try selling it because probate court expenses will be high. Being the only living family member (age 88), my brother's will names me to receive any remaining assets, such as the land. Can I sell the 10 acres without probate? I sure could use the money from the sale - Felix McC.

DEAR FELIX: Now you understand why I constantly advise real estate owners to include all their real estate in their living trusts to avoid probate. Your brother apparently forgot to deed his land into his living trust, thus causing you needless costs and delays.

Although there is apparently only the land asset that is subject to your brother's will, a probate proceeding must be opened so the will can be presented to the court and the land title transferred to you according to the terms of the will. Just because you are the only heir doesn't entitle you to transfer title without probate court approval.

However, in many jurisdictions, there are informal probate procedures where the asset value subject to the will is small. I suggest you hire a probate attorney in the county where the land is located.

HOW UNMARRIED HOMEOWNERS CAN CLAIM $500,000 TAX BREAK

DEAR BOB: We are not married, but we are building a house as our primary residence where we will be living together for two years or more. Is it necessary to be married to qualify for the $500,000 home sale tax exemption, or could we form a partnership? -Joseph K.

DEAR JOSEPH: When two (or more) unmarried individuals share the same primary residence, Internal Revenue Code 121 allows each co-owner up to $250,000 tax-free capital gains upon sale. For each of you to qualify, both names must be on the title and you must each own and occupy the principal residence at least 24 of the 60 months before its sale. For full details, please consult your tax adviser.

SELLER FINANCING IS IDEAL FOR STUDIO CONDO SALE

DEAR BOB: I currently rent a studio condo from an owner who owns several units in my building. I would like to buy the condo where I reside, but financing might be difficult. Would it be possible to have the seller finance my purchase? If so, how do I go about setting this up for our mutual advantage? - Patrick R.

DEAR PATRICK: If your seller owns the studio condo free and clear with no mortgage, a seller-financed mortgage, called an "installment sale," would be a "good deal" for both you and the seller.

You and the seller should sign a written sales contract, specifying the sales price, your cash down payment, and the amount and terms of the mortgage the seller will carry back for you. The buyer usually includes in the purchase offer the mortgage amount, interest rate, monthly payment, and term. If that's not acceptable to the seller, then the seller can counter offer.

The seller's security is a recorded mortgage or deed of trust against your condo title. Sellers get to spread out their capital gains tax over the years they receive payments from you. But the tax-deductible interest you pay is taxable as ordinary income to the seller.

Older sellers especially enjoy seller financing because it gives them steady retirement income without worry about "tenants and toilets." If you default, the seller can foreclose and either gets paid in full at the foreclosure sale or gets the title back to resell for a second profit. A local real estate attorney can handle the documentation.

PAYING OFF A HOME MORTGAGE ISN'T VERY COMPLICATED

DEAR BOB: I have two payments left on my mortgage, but I am very scared. I have an impounded loan with the homeowner's insurance and property taxes all included in my monthly payments. I need to know how I can protect myself when I receive official ownership of my home. When I phoned the lender, I was told they will let me know the exact final payment amount and I will receive a "paid-in-full" letter within 15 days after my last payment, but it will take 90 days for a new deed to arrive. After my mortgage is paid off, how will I pay the insurance and property taxes? - Rosalie B.

DEAR ROSALIE: Congratulations on reaching the final payments on your home mortgage. There's nothing to be scared about.

Just continue making your two last on-time payments. As you were told, your final payment may be slightly different to adjust for the fees of paying off the mortgage.

Be sure to ask your lender to promptly mail you a check for the balance in your escrow impound account for the homeowner's insurance and property taxes. That's your money. After your mortgage is paid off, you will get to pay those bills directly to your insurance company and the local property tax collector.

Although mortgage lenders are supposed to promptly clear a paid-off mortgage or deed of trust from your home's title, some lenders are very slow to do this. After 90 days, be sure to follow up and be certain you received evidence the lender recorded either a deed of reconveyance or a mortgage satisfaction. You will then own your home free and clear.

NO STEPPED-UP BASIS UNLESS YOU INHERIT PROPERTY

DEAR BOB: When my husband was diagnosed with Alzheimer's disease I sought estate planning. The lawyer changed our house title from joint tenancy with a quit claim deeding the house to my name alone to avoid possible problems if my husband had to go to a nursing home. Although he became severely disabled, he stayed at home with me until he died in July 2003. A friend told me I should have something done because I will not get a stepped-up basis if I decide to sell the house. We paid $59,000 in 1976 and today the house is worth about $600,000. Did we make a big mistake? Can the title transfer be undone? - Irene D.

DEAR IRENE: Unfortunately, you didn't receive a stepped-up basis when your husband died because you didn't receive any property interest from him at that time. Lifetime marital transfers between spouses, although tax-free, do not create stepped-up basis.

I am not aware how the recorded title transfer to you several years ago can be "undone" so you could receive your late husband's share of the house by inheritance to get a new stepped-up basis to market value as of the date he died.

If you decide to sell the house, your adjusted cost basis will be the $59,000 purchase price, plus capital improvements added during ownership. Of course, you will have the $250,000 single tax exemption allowed by Internal Revenue Code 121, presuming you own and occupy your principal residence 24 of the 60 months before its sale. For full details, please consult your tax adviser.

A WILL HAS NO EFFECT ON JOINT TENANCY PROPERTY

DEAR BOB: My elderly friend and I are on the deed to her house as joint tenants with right of survivorship. Her will says I am her personal representative. The will leaves all her real property, including the house and contents, to be divided equally between myself and two other people. She is a widow and her only son is deceased. Is this sufficient? -Pat S.

DEAR PAT: No. Your friend's will has no effect on the house, which is titled in joint- tenancy with right of survivorship. If your friend dies before you do, you will receive the full title to the house as the surviving joint tenant but not under the will. If you die first, then your friend owns the house by survivorship.

The two other people named in your friend's will won't receive any interest in that house. For full details, she should consult her attorney.

REVERSE MORTGAGES ARE NOT MOVEABLE

DEAR BOB: If we get a senior citizen reverse mortgage on our home, and decide to move in a few years, can we move the reverse mortgage to our new home? I am 73 and my wife is 69, both in good health. Who do you recommend we contact for local reverse mortgage information? - Donald S.

DEAR DONALD: Senior citizen reverse mortgages are not moveable. Because of the substantial up-front costs, I suggest you don't obtain a reverse mortgage unless you plan to stay in your current home at least five years.

When you decide to sell your home, its reverse mortgage must be paid off from the sales proceeds. Then you could get another reverse mortgage on your next house or condo.

The best place to find local reverse mortgage representatives is on the Internet at www.reversemortgage.org where you will find local state-by-state reverse mortgage agent listings. More details are in my special report, "The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners," available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.