DEAR BOB: I recently talked to a lawyer about putting my house into a living trust to avoid probate, as you often suggest. He said there is no need to go to the expense of creating a living trust. I was advised to just have a quit claim deed prepared and keep it with my important documents. When I die, he says the quit claim deed will be found and then the person named will be able to receive my house without having to go through probate. Does this sound legitimate to you? – Heidi B.
DEAR HEIDI: I am shocked a fellow attorney would give such advice. If a quit claim deed, or any type of deed, is not delivered unconditionally to the grantee during the grantor’s lifetime, it is not a valid complete delivery of the deed.
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In other words, you still control the property and can sell or refinance it. After your death, an undelivered quit claim deed found with your papers can be challenged by your heirs and creditors.
I suspect that attorney either wants to handle the profitable probate of your estate after you pass on, or he just doesn’t know the pitfalls of an undelivered quit claim deed.
Or, suppose by the time you die, the grantee named in a quit claim deed has pre-deceased you. Then who will receive your property after your death?
A revocable living trust is a far better alternative. The modest cost is usually far less than the expenses and delays your heirs will encounter if your major assets have to pass through probate court. While you are alive, you can manage your living-trust assets just as you do now, including selling and refinancing.
But when you become incapacitated or die, your living-trust successor trustee then takes over living-trust asset management. Of course, probate costs and delays are avoided. More details are in my special report, “Living Trust Pros and Cons for Avoiding Probate Costs and Delays for Your Heirs,” available for $4 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.
APPRAISAL FEE IS SMALL PRICE TO GET RID OF P.M.I. (PRIVATE MORTGAGE INSURANCE) EXPENSE
DEAR BOB: Almost three years ago, I purchased my home with about 15 percent cash down payment. Because I didn’t pay 20 percent down, the mortgage lender required PMI (private mortgage insurance). After reading your recent article about PMI, I called my lender and was told I can get my PMI premium removed but I have to pay for a professional appraisal. They strongly recommended their appraisal company. Is there any way I can get rid of PMI without paying for an appraisal, as I believe my loan-to-value ratio is less than 75 percent? – Maureen D.
DEAR MAUREEN: Paying a $300 or $400 professional appraisal fee to cancel your PMI is a small price to pay for getting rid of your monthly PMI premiums. Your lender needs current market-value appraisal documentation to justify canceling your PMI.
Be sure to be present when the appraiser visits your home to point out all its features. Also, give the appraiser any written sales price details with addresses you have on recent nearby comparable home sales, which justify the estimate of your home’s current market value.
If the new appraisal shows you have at least 20 percent home equity, your lender should then promptly cancel your PMI premium.
CONDO ASSOCIATION LAWSUIT MIGHT PROVE COSTLY
DEAR BOB: I own a condo where the homeowner’s association is suing the developer about several disputes. At first, it looked like we had a solid case. But the developer counter-claimed against the association and our attorney said he wouldn’t have taken the case if he then knew all the hidden facts. If our homeowner’s association should lose and get a big judgment against us, as an individual condo owner might I be liable to pay part of that judgment? – Henry H.
DEAR HENRY: Possibly. Let’s hope your homeowner’s association has good insurance, a fat reserve balance, and a superb attorney. It’s possible if the homeowner’s association doesn’t have sufficient funds and insurance to pay a judgment, the condo homeowners could have to pay a special assessment for the judgment.
That’s what happened a few months ago in the case of James F. O’Toole Co. v. Los Angeles Kingsbury Court Owners Association (23 Cal.Rptr.3d 894) where the homeowner’s association refused to pay a $110,000 judgment to Mr. O’Toole due to lack of funds. The court said the homeowner’s association must levy a special assessment on its condo owners to pay the judgment.
HUSBAND’S PART-TIME HOME IS HIS PRINCIPAL RESIDENCE
DEAR BOB: I love your articles and have learned so much. But I have a question I haven’t seen before. My husband lives and works in another city five or six days each week. Four years ago, we bought a condo there where he lives during the work week. Our plan is to sell the condo after five years of ownership. Will this qualify as his principal residence for that $250,000 tax exemption? – Linda S.
DEAR LINDA: A principal residence is where the owner spends most of his or her time. If your husband lives in that condo five or six days each week, it sounds like his principal residence.
To qualify for the Internal Revenue Code 121 $250,000 tax exemption, he must have owned and occupied the condo an “aggregate” 24 of the 60 months before its sale. However, you can’t qualify for an additional spousal $250,000 exemption because you haven’t met the occupancy test. For full details, please consult your tax adviser.
HOME REMODELER USES I.R.C. 121 EVERY 24 MONTHS
DEAR BOB: I especially enjoyed that recent letter from the reader asking if she can use IRC 121 every five years. You correctly said she can use it as often as every 24 months. In fact, this great tax law has spawned a new group of investors like me who use this tax break every two years to build up our retirement nest eggs. I buy homes that need fix-up to increase their market value while building up my tax-free retirement assets. I started with a $17,000 investment and have managed to retire in just eight years. But I continue to buy fixer-uppers and upgrade them to resell for tax-free profits up to $250,000. Just thought you would want to know – Tim C.
DEAR TIM: Thank you for sharing your profitable tax-free home fix-up plan. Of course, the only disadvantage to your plan is living in the residence while it undergoes renovation. But the big benefit of up to $250,000 principal-residence tax-free profits (up to $500,000 if you’re married and file a joint tax return) every 24 months is worthwhile.
TOWNHOUSE GIFT CAN BE EXPENSIVE UPON RESALE
DEAR BOB: About 15 years ago, my parents gifted their townhouse to me. I occupied it for a few years but then moved out and have been renting it to tenants since then. I take annual depreciation on my Schedule E income tax return. What would be my appropriate method to establish the depreciable basis for this property? – John N.
DEAR JOHN: Are you sitting down? Can you accept bad news?
When your parents gifted that property to you 15 years ago, as the donee you took over their probably very low adjusted cost basis. That was your depreciable basis (minus your share of the land value, which is non-depreciable).
When you decide to sell the townhouse, you will have a huge capital gain because your basis is very low, especially after deducting depreciation.
Of course, you can avoid paying capital gain tax by making an Internal Revenue Code 1031 tax-deferred exchange for another rental property of equal or greater market value and equity. For full details, please consult your tax adviser.
WHY DOES F.H.A. CHARGE A 2 PERCENT REVERSE MORTGAGE FEE?
DEAR BOB: Regarding senior citizen reverse mortgages, why does FHA charge a 2 percent fee if the money borrowed is mine since it comes from my home equity? Why do my heirs have to pay it after I am deceased since the borrowed money is my equity? – Sylvia J.
DEAR SYLVIA: The 2 percent FHA senior citizen reverse mortgage loan fee pays the mortgage lender for originating your reverse mortgage. You don’t expect the lender’s representative to work for free, do you?
When the lender loans you money on your reverse mortgage, presuming you are 62 or older, whether you select the lifetime monthly income payments, credit line (except in Texas), and/or a lump sum, the lender expects to earn interest on that loaned money you receive.
But no repayment is due on the reverse mortgage principal and accrued interest until the senior citizen sells the home, moves out longer than 12 months, or dies. Then the reverse mortgage “matures” and its balance must be paid from the sales proceeds. The remaining home equity goes to you or your heirs.
Because a reverse mortgage is “non-recourse,” you or your heirs never have any personal liability for repayment even if you live to 120.
If your heirs want to keep your home, they can pay off the reverse mortgage by refinancing. Details are in my brand new special report, “The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners,” available for $4 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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