The Wiewel Law Firm

Can You Apply for a Mortgage at an Advanced Age?

“Federal law, under the Equal Credit Opportunity Act, forbids discrimination in the mortgage market on the basis of age. Nonetheless, loan officers say older borrowers often don’t realize they can get loans with terms that will expire on their 110th, 120th or nearly 130th birthdays.”

A senior loan officer with a mortgage company in Florida recently wrote a 30-year loan for a retiree who was purchasing a home in New Port Rickey. He didn’t expect to have trouble qualifying for the loan, but he was surprised that he did.

That’s because he was 97 years old.

Under the Equal Credit Opportunity Act, federal law forbids discrimination in the mortgage market on the basis of age, reports The Wall Street Journal in a recent article “You’re Never Too Old to Apply for a Mortgage.” However, most seniors don’t know that they can get loans that will expire on their 110^th, 120^th and even later birthdays. In fact, the Federal Housing Finance Agency says that borrowers over age 65 make up ten percent of all mortgages originated annually.

Some lenders are working harder to find ways to qualify retirees, including rolling out lending programs that allow borrowers to use their investment portfolios to qualify without taking monthly distributions. Loan officers, especially in areas with large numbers of retirees, have become skilled at adding up income streams, helping borrowers establish new ones and willingly guiding them through the process.

The simplest way is for a retiree to add up their monthly fixed income from all sources, which are then treated like a salary by the lenders. If those numbers are not high enough, the next step is to create an ongoing distribution from a retirement account, like an IRA or 401(k). For one mortgage lender, a retired borrower needs to show $8,000 of monthly income for a 30-year home purchase loan. The borrower set up a distribution for that amount from an IRA worth $500,000, and had her financial advisor draft a letter to the lending company about the new income stream. This made her qualified for the loan, even though at that rate, her entire IRA would be drained in five or six years. Fannie Mae rules only require that distributions are guaranteed to continue for three years.

If the property produces income, those funds can be counted towards the qualifying amount. However, the underlying value of the property, even if it is owned outright or if there is a lot of equity in the home, is not considered by the lender. Property tax and homeowner’s insurance are measured as debt in the debt-to-income equation.

If qualifying is still a problem, lenders are increasingly willing to include stocks, bonds, and mutual funds. This is very different than creating a distribution steam that counts as income. The borrower is not required to take a monthly amount from their portfolio. The lender uses a formula called “asset depreciation” or “asset annuitization or depletion” to impute a monthly distribution from the investment portfolio.

Some jumbo lenders who cater to high net worth individuals have more liberal asset depreciation programs. In New York, an 83-year-old retired co-op owner received a $1 million, 10-year, interest only adjustable rate mortgage for a re-finance at a highly competitive rate through a bank’s program similar to an asset depreciation plan. With the deposit of a few hundred thousand dollars into the bank, the owner qualified based on a portfolio of stocks and bonds valued at $1.6 million.

Speak with your estate planning lawyer before making this kind of large financial decision, since it may have a significant impact on your overall estate plan.

Reference: Barron’s (Jan. 16, 2020) “You’re Never Too Old to Apply for a Mortgage”

Should Retirees Buy Vacation Homes?

“While many retirees have considered purchasing a vacation home to escape cold winters, to rent out for income, or simply have a gathering place for far-flung family members, there are a number of financial matters to consider that could make ownership onerous.”

It sounds like a great idea. After all, it’s an investment in real estate and it could be passed along to the next generation. It might be a rental property, too, generating income when the owners aren’t able to enjoy it. However, there are some things to be careful of, warns Barron’s in the article “What Retirees Should Know Before Buying a Vacation Home.”

Taxes, maintenance, insurance and possibly the cost of hiring a rental-management company are just a few things to consider. Above all, don’t think of it as an investment This is because with real estate, there are no guarantees. For one thing, it’s not liquid. You can’t count on selling it for a good price, when you need some ready cash.

The first and most important question: can you afford it? Retirees are usually living on a fixed income. The cost of a vacation home can be loaded with surprises, just like any other property. If there’s enough of a nest egg to live on and there won’t ever be a need to sell fast, then it may be a good move.

If there’s enough money to purchase the home, then investing in someone to manage the property is a good idea. Empty homes are targets for thieves, and if there’s a maintenance issue, an uninhabited home is vulnerable to damages.

Where taxes are concerned, the sale of a second home does not give the seller the same capital gains tax exemption as the sale of a primary residence. That exemption is only available for people who have lived in the home as a primary residence for at least two of the previous five years. The exemption is up to $500,000 for married couples.

There is one way around it, if it makes sense for owners. Let’s say that they plan on downsizing from their primary residence. They sell it and use the tax exemption. They then move to the vacation home, for at least two years, using that as their primary residence. At that point, they can sell the home that has now become a primary residence, enjoy the generous tax exemption and then move to a new primary residence.

As a rental property, owners are permitted to rent for up to 14 days without owing any taxes on the rental income. After the 14-day period, taxes must be paid, but some of the rental expenses are tax deductible.

If the intent is to keep the house for as long as the owners are living, it becomes part of the estate and must be included in an estate plan. Leaving it to the next generation may be feasible, if all of the children want to keep the house and can afford its upkeep. Have the conversation with the children first. Giving the house to children can be accomplished by putting it into a limited liability corporation with an operating agreement that defines it. Each child will have a stake in the entity that owns the home, rather than the house itself.

Talk with your estate planning lawyer about how the purchase and inheritance of a vacation home may impact your overall estate plan before making a purchase.

Reference: Barron’s (Jan. 18, 2020) “What Retirees Should Know Before Buying a Vacation Home”

The Many Responsibilities of Inheriting a Home

“Understanding what happens when you inherit a house, as well as addressing the tough financial and emotional decisions on what to do with the home, can be intimidating.”

When you inherit a home, there are three key factors to consider: the financial and legal responsibilities of the home, the tax liabilities of the home and what you’ll eventually do with the home. All of these different things relate to each other, explains Million Acres in “A Guide to What Happens When You Inherit a House.”

Let’s look at taxes first. There’s no federal tax associated with inheriting a house, but some states have inheritance taxes. For most situations, this inheritance does not lead to an immediate tax liability. When a property is inherited, the IRS establishes a fair market value for the property, which is the new basis for the property. This is a step-up basis. It is the valuation that is used to set future taxes, when the property is sold.

Capital gains are a tax relating to the profits generated from selling an asset, in this case, a house. The step up in basis means the heir only has to pay capital gains taxes, if the home is sold. The taxes will be the difference between the fair market value set at the time of the inheritance and the selling price.

If the property has a mortgage, heirs will need to know what type of mortgage it is and if it is assumable or due on sale. Most mortgage companies allow heirs to take over the payments, according to the original loan terms. However, if there is a reverse mortgage on the home, the unpaid balance is due when the person who took out the reverse mortgage dies. This usually requires the heirs to sell the home to settle the debt.

The condition of the inherited home often determines what heirs decide to do with the house. If it hasn’t been maintained and needs major work, it may be easier to sell it as-is, rather than undertake renovations. Heirs are responsible for taxes, insurance and maintenance. However, if the house is in good shape, it may make sense to keep it.

What happens when siblings inherit a house together? That can get complicated, if each person has a different idea about what to do with the house. One may want to sell now for cash, while another may want to rent it out for income. What ultimately happens to the property, may depend on how well the siblings communicate and make decisions together.

Often the best option is to simply sell the home, especially if multiple heirs are involved. Note that there are costs associated with the sale of the house. This includes any outstanding debts, like a mortgage, the cost of fixing up the home to prepare it for sale, closing costs and fees and real estate agent commissions. If there is a profit on the sale of the home from the tax basis at the time of inheritance, the heirs may need to pay short-term or long-term capital gains tax, depending on how long they held the property.

Talk with an estate planning attorney about managing the sale of the family home. They will be able to guide you, advise you about taxes and keep the family moving through the process of settling the estate.

Reference: Million Acres (December 4, 2019) “A Guide to What Happens When You Inherit a House”

Remaining Even and Fair in Estate Distribution

“We have money in savings and retirement accounts, but our most valuable asset is our home. We want to leave our property to our two children equally.”

Treating everyone equally in estate planning can get complicated, even with the best of intentions. What if a family wants to leave their home to their daughter, who lives locally, but wants to be sure that their son, who lives far away, receives his fair share of their estate? It takes some planning, says the Davis Enterprise in the article “Keeping things even for the kids.” The most important thing to know is that if the parents want to make their distribution equitable, they can.

If the daughter takes the family home, she’ll need to have an appraisal of the home done by a certified real estate appraiser. Then, she has options. She can either pay her brother his share in cash, or she can obtain a mortgage in order to pay him.

Property taxes are another concern. The taxes vary because the amount of the tax is based on the assessed value of the real property. That is the amount of money that was paid for the property, plus certain improvements. In California, property taxes are paid to the county on one percent of the property’s “assessed value,” also known as the “base year value” along with any additional parcel taxes that have become law. The base year value increases annually by two percent every year. This was created in the 1970s, under California’s Proposition 13.

Here’s the issue: the overall increase in the value of real property has outpaced the assessed value of real property. Longtime residents who purchased a home, years ago still enjoy low taxes, while newer residents pay more. If the property changes ownership, the purchase could reset the “base year value,” and increase the taxes. However, there is an exception when the property is transferred from a parent to a child. If the child takes over ownership of the home, they will have the same adjusted base year value as their parents.

If the house is going from parents to daughter, it seems like it should be a simple matter. However, it is not. Here’s where you need an experienced estate planning attorney. If the estate planning documents say that each child should receive “equal shares” in the home, each child receives a one-half interest in the home. If the daughter takes the house and equalizes the distribution by buying out the son’s share, she can do that. However, the property tax assessor will see that acquisition of her brother’s half interest in the property as a “sibling to sibling” transfer. There is no exclusion for that. The one-half interest in the property will then be reassessed to the fair market value of the home at the time of the transfer—when the siblings inherit the property. The property tax will go up.

There may be a solution, depending upon the laws of your state. One attorney discovered that the addition of certain language to estate planning documents allowed one sibling to buy out the other sibling and maintain the parent-child exclusion from reassessment. The special language gives the child the option to purchase the property from the other. Make sure your estate planning attorney investigates this thoroughly, since the rules in your jurisdiction may be different.

Reference: Davis Enterprise (Oct. 27, 2019) “Keeping things even for the kids”

Home Equity Can Be Used in Retirement but Be Careful

If you move forward with home equity be very smart and be very careful.

When your retirement years come along your home equity can be used but it is wise to approach that option cautiously, according to Forbes in “7 Ways to Use Your Home Equity for Retirement Income.”

Late starters to retirement need to think a little differently than others. If you must do it, your home can be leveraged to help your retirement income picture.

Remember that your home is treated as a special asset by the IRS. If you are married filing jointly, you can exclude up to $500,000 in gains from income taxes on the sale of your residence. If you are single and file independently, you can exclude up to $250,000 in gains.

Therefore, you can buy a house, live in it, sell it, and pay no taxes for the first $500,000. You have to own the home and have lived there for two out of the last five years. If you bought a home for $250,000, lived there for at least 24 months out of a five-year period and sold it for $750,000, your $500,000 gain would be income tax free. That doesn’t always happen, but it would be a great deal if it did!

Here’s how to turn home equity into retirement income:

Downsize and invest the proceeds. Sell your home when you retire and purchase something that costs significantly less. Remember that everything gets smaller when the house gets smaller: taxes, the cost of maintenance and utilities. You can use more of the proceeds to invest and rent a home.

Sell and move to a less expensive community. Don’t just look at lists for places where taxes are less, although that is a factor. Find a place where the cost of living is cheap—like some college towns, which offer a variety of activities and, if the college has a top-ranked medical school, excellent health care. Do your homework and see what works for you and your family. If you move far away, remember to add in travel costs.

Become an ex-pat. Some people retire outside of the U.S., where the dollar stretches even further. Costa Rica and Portugal are two places that retirees favor for low cost of living and affordable quality medical care.

Sell your home, live on the proceeds and get a property management job that includes low or no rent. You’ll need a certain skill set to take on this job, but if are able and willing to provide building maintenance services, you could find yourself living rent-free.

Sell the house and move in with the kids. Families do this all over the world, and for many, it’s a way to keep the family closer. It can work, as long as everyone agrees to it. Parents get an extra set of hands with the children, children get to know their grandparents far better than a once-a-year visit to Florida and travel costs are reduced or eliminated.

Rent out part of your house or do a home share. If the layout works, you could take in a roommate or a boarder. You could move into a smaller part of the house and let the renter have the larger space. You could also rent to someone who has retired and doesn’t want to live in an apartment. Technology can expand your reach or check into sites geared to seniors.

Stay in the house and take out a reverse mortgage. A reverse mortgage lets you tap the equity of your home, either as a lump sum or a line of credit, while still owning your home. You must be over age 62, and you still have to pay taxes and maintain the house, including paying for homeowner’s insurance. When you sell the house, you or your heirs pay off the loan and any remaining equity is yours to keep or goes to your heirs. There are closing costs, which are not cheap. However, this is a way to stay in your own home.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and your retirement options.

Reference: Forbes (Sep. 19, 2018) “7 Ways to Use Your Home Equity for Retirement Income”

Inheriting Land

One of the more difficult aspects of estate planning is how to handle real estate. This is because how the real estate is inherited can have important tax considerations for the heirs.

Quite often when people inherit land, they wish to sell it afterwards. For example, if you leave your home to your children and they already have homes of their own or live in different parts of the country, they will normally want to sell that home.

Whether or not you mention that possibility in your will has important tax consequences for your children as mentioned by FOX Businessin a recent article titled "How to Deal with Disputes Over Inherited Land."

As the article notes, if the sale of the land is directed in the will with the proceeds to be split between any heirs, then the land is still treated as property of the estate and any taxes are paid by the estate. There is also a step up in basis benefit for capital gains tax purposes.

However, if the sale is not directed in a will, then the heirs have to pay the taxes out of their respective shares of the proceeds.

Finally, if one person is left the property and decides to sell it to give the proceeds to the others, there are gift tax issues that need to be considered.

When leaving any type of land to your heirs, you need the assistance of an experienced estate planning attorney to make sure it is done in a manner that will minimize potential taxes.

Reference: FOX Business (November 4, 2014) "How to Deal With Disputes Over Inherited Land"

Bill and Hillary Have a QPRT—Is It Right for You?

Qualified personal residence trust has enabled Bill and Hillary to save on estate taxes but it doesn't make sense for everyone. An oldie-but-goodie tax strategy is back in the limelight thanks to the Clintons' much-publicized attempts to soften the blow of estate and gift taxes. The qualified personal residence trust is back. Bill and Hillary Clinton are making headlines for their use of the qualified personal residence trust or QPRT to save on estate and gift taxes. The Clintons drafted two (Qualified Personal Residence Trusts) QPRTs in 2010, divided the ownership of their Chappaqua, N.Y. home into separate 50% shares, and then moved those shares into the trusts, according to Bloomberg News. They bought the home 15 years ago for $1.7 million. Bloomberg says its estimated value for property taxes is $1.8 million. This tax strategy allows the Clintons to take the value of the home out of their taxable estate and pass it to beneficiaries without any estate tax at the end of the trust's term, so long as the grantors, President and Secretary Clinton, are alive at that time. As an Investment News article, titled "Clintons shine spotlight on tax strategy that splits a house in two," explains that this is not a tool for everybody. A QPRT really is logical for only extremely wealthy people who typically own multiple residences and face high estate taxes. The article advises that to get "the biggest bang for your buck," the residence should be appreciating in value, so that when it is passed to the beneficiary and out of the estate, it will be worth significantly more. The current estate tax and gift tax exemptions are $5.34 million for individuals, and $10.68 million for married couples filing jointly. An ideal candidate for a QPRT is an individual or a couple whose wealth is above those limits. Why? Because if you are over the exemption amount, you will be subject to estate taxes. If you are not above the limit, it is not a worthwhile plan. With a QPRT, a couple like the Clintons are able to split the ownership of the house and each create a QPRT with an interest in the home. There are criteria the home must satisfy in order to be eligible for the trust. For example, this works best with a secondary residence (a vacation home) instead of a primary residence. Here is the rub - at the end of the QPRT term, the home passes to the beneficiary. The beneficiary will have to start charging the grantor rent should the grantor reside there, and some parents do not like the idea of paying fair market rent to their children to live the home that has been their primary residence. Nonetheless, rent can work out as a way for grantors to transfer wealth to their kids outside of the estate, as the children must declare that rent as income. The original article also warns that there could be an economic downturn. This, in turn, might leave the grantors with little in the way of assets and no access to home equity. The house also should not have a mortgage, which can add income tax problems to the calculus. This is not a Saturday morning job on the honey-do list: drafting a QPRT is a job that will require experienced professional tax and estate planners. Talk with your estate planning attorney if you think that you are candidate for a QPRT, or even if you are not, to see if your current strategy is the best for you. Reference: Investment News (June 27, 2014) "Clintons shine spotlight on tax strategy that splits a house in two"

What Will You Do with Your House?

Real estate is often a family’s most valuable asset. It can be passed down from generation to generation and frequently carries a sentimental value beyond money. Handing down a major asset, however, is far from straightforward.

“The right time to create an estate plan has little to do with age and everything to do with the stage of your life,” according to a recent Forbes article titled "Passing Down Your Home? 3 Steps To Creating A Successful Estate Plan."Whatever the reason for developing an estate plan [and just because it is a good idea works!], once you are ready to start planning the Forbes article advises these steps:

Step 1: Communication.When parents and grandparents leave important details to chance, the results can be catastrophic. Estate planning can be an emotional process—especially when children or grandchildren grew up in the home. Speaking with all of them and maintaining close contact with financial advisors can help families remain in control and diffuse any potential tension. An estate planning attorney can also help families manage the many moving parts of real estate inheritance. As the article advises, find "an experienced, high-end estate attorney to do this for you."

Step 2: Your Tax Situation.When passing down your home tax issues can be a real hassle, especially for high net worth individuals (estates valued at $3 to $11 million). There are different planning and tax strategies for these individuals, to include setting up trusts called Qualified Personal Residence Trusts (QPRTs) to discount the value of their estates. QPRTs follow IRS rate schedules that allow families to discount the value of their properties based on the amount of time they have lived in them. QPRTs also allow families to transfer homes to inheritors as a gift, which results in a lower tax rate. Estate planning attorneys will determine the discount that can be applied to value of your home. The longer you commit to living in a house, the bigger the discount can be.

Step 3: Plan a Maintenance Fund.The Forbes article warns that passing a home down to your children is about more than just transferring the property itself—there is maintenance and up-keep. Parents need to develop a plan to help their children and future generations finance repairs and other unforeseen maintenance expenses.

Passing down your home is a delicate process that impacts your entire family. Your family home is one of your most valuable assets and a source of treasured family memories. With diligent planning and partnerships with a qualified estate planning attorney, you can help make sure that your home remains well-maintained and in your family for years to come.

Reference: Forbes (June 30, 2014) "Passing Down Your Home? 3 Steps To Creating A Successful Estate Plan"

What's A Living Trust And Do I Need One?

Owning any real estate is a good reason to have a living trust. The same applies to stock and other securities held outside of a retirement account.

A living trust is a great idea if you have a sizeable estate with real property involved. A living trust is created by placing some or all of your estate into a trust where you are the trustee and the beneficiary while you are alive. You name an administrator and secondary beneficiaries before you pass away, so that the property in the trust will avoid probate.

The title of a recent article in Redlands Daily Facts says it all: “Do I Need a Living Trust?”

For a married couple, another option is an AB or "by-pass" trust. Rather than each spouse leaving their property outright to each other, both place their property into their own revocable trust. When the first spouse dies, the surviving spouse receives income from the decedent’s trust property and in some situations has access to the principal. With an AB trust, the couple's children will typically inherit the trust property after the second spouse dies (as named beneficiaries of the trust). Due to the fact that the surviving spouse doesn't actually own the trust assets, they are not part of the surviving spouse's estate. As a result, those assets would not be subject to tax at the second spouse's death.

Trusts can be a real benefit to you, but they can get tricky quite quickly. It's best to speak with a knowledgeable estate planning attorney to examine your specific situation and needs.

Reference:  Redlands Daily Facts, February 25, 2014: “Do I Need a Living Trust?”

Estate Planning, Real Estate, Elder Law

Probate court is no one's idea of fun, so it's something you may want to spare your heirs when they inherit your home. One simple tool for doing that: a "life estate."

Do you want to avoid probate when it comes to the transfer of your assets at death, especially when it comes to your home? Perhaps you would prefer that home to pass directly into the hands of your adult heirs. If yes, then consider using a “life estate” approach.

If the concept of a life estate is new to you, then a recent article in The Wall Street Journal ought to be on your reading list. As the article titled “An Easy Way for Heirs to Inherit Your Home” explains, a life estate for real estate operates like a “payable-on-death account” for a bank account.

Here is how a life estate works. First, you draw up a deed to your house naming your heirs as beneficiaries. Second, you live in the house for the rest of your life. Third and lastly, after you pass, your named heirs need only to present your death certificate to assume title to the family home. This can save time and money often associated with probate. Simple?

A life estate may be too simple, depending on the circumstances. As with most things legal, things can get complicated quickly. For example, you will not be free to sell your home during your lifetime without beneficiary consent and there are tax issues to consider.

Depending upon the home and your objectives, there may be better ways to transfer the family home. Regardless, a life estate is a proven transfer tool just right for the right circumstances.

Reference: The Wall Street Journal (February 9, 2014) “An Easy Way for Heirs to Inherit Your Home”