Yearly Archives: 2010

How do I get a free nursing home?

Estate Planning, Medicaid

“How do I protect my assets so that the state doesn’t get everything if I have to go into a nursing home?” This is, by far, the most common question that I answer.

I prepare many living trusts for clients, so this question comes up almost every time I meet with a client. It’s really hard to answer, and every time I hear it, I kind of cringe. The answer will not be what people want to hear. As I explain, clients stare at me with a glazed over look like, does this guy know what he’s talking about?

Here is what people are afraid of: The average cost of a nursing home is $219.00/day and rising. That’s almost $80,000.00 per year. The average nursing home stay is 2.5 years.

No one’s fondest dream is to see their assets depleted by a nursing home. But, in this Tea Party age with constant calls for limited government spending, I am always surprised that so many people think that long-term nursing home care is something that they should not have to pay for, or that they can easily qualify for by a simple legal maneuver.  I think a person’s money should be used to make them comfortable in the best environment that is affordable. In reality, medicaid is a safety net program for the truly indigent.

On the other hand, health insurance covers you when you are sick… why should long-term nursing care be any different from  having your gall bladder removed or any other illness? I don’t know the answer to these tricky questions.

But here are some of the answers to why it is now hard to qualify for medicaid:

Does my living trust “protect” my assets so that I can get medicaid if I need it?

No, a living trust will not help qualify you for medicaid.

Is there a type of trust that I can use to qualify for medicaid?

Yes, there is an irrevocable, medicaid income-only trust. You cannot be trustee. You can’t change the trust. You can only get the income from your assets. I rarely use these because they are very restrictive.

What assets can I keep and still qualify for medicaid?

You can keep $2000.00 in assets and a prepaid funeral. A house is exempt too, but only temporarily. After 6 months in a nursing home, it is presumed you will not return to the home and then a lien can be placed on the house. (There are other rules for married couples.)

Can I give away my assets and qualify for medicaid?

If  you have ESP and know when you will need medicaid and don’t mind parting with all of your assets then, yes, if you gift away all of your funds 5 years or more before you need a nursing home, you will get the free medicaid nursing care. Other than that, it is very hard to protect your assets in such a way that you will qualify for medicaid.

Does medicaid keep my pensions and social security if I qualify?

Medicaid will take all social security income, pensions and other income except for $30.00/per month.

Why is it harder now to gift assets and qualify for medicaid?

This has to do with the so called “penalty period.”  When someone applied for medicaid under the old law, your checking accounts and other bank statements were checked for the last 36 months for gifts or transfers to family members or others. This is called the “look back” period. Medicaid did not care about gifts made more than 36 months prior to the medicaid application. So if a gift of $50,000 was made more than 36 months before the medicaid application, the applicant would qualify for medicaid. If they found gifts within the 36 months then there was a “penalty period.” Under the old law, the penalty period started when the gift was made. In Illinois, the penalty amount was about $5000.00 per month, so if you gifted $50,000.00 within the 36 month look back period, you were penalized for 10 months from the date that you made the gift and after that you would qualify for medicaid. Confused yet? If not, you are a savant…It was easy under the old law to made gifts over time and still qualify for medicaid.

Now, the look-back period is 60 months. Worse yet, when a gift is made, the penalty period now starts when the client enters the nursing home. So, if a client gifts $50,000.00, the penalty period of $5000.00 per month will make the client ineligible for medicaid for 10 months from the date they enter the nursing home. This makes gifting away assets an almost unusable strategy.  The current laws encourage people to buy long-term care insurance and make it hard for those with substantial assets to gift the assets and still qualify for medicaid.

So how am I supposed to pay for a nursing home if I need it?

There are only three ways to pay for long-term nursing care:

1. Use your own funds to pay for care, or self-insure.

2. Buy long-term care insurance to cover some, or all, of the charges. Some clients buy long term care insurance to cover their expense for 3 to 5 years, which carries lower premiums than a lifetime benefit.

3. Have medicaid pay for your care.

Should I buy long-term care insurance?

If you can self-insure, then you won’t need long-term care insurance.

Anyone with assets of $1 million or more can probably safely self-insure.

Those with assets of $1 million or less, should consider some sort of long-term care insurance.

One less quirk to buying a Fannie Mae foreclosure

foreclosures-shortsales, Real Estate-Purchases
Last fall, I whined about how hard it was to buy a foreclosed property from Fannie Mae. It’s still true that Fannie Mae is a tough seller and a pain to buy from.  (I have a Fannie Mae purchase now.  It’s been weeks, but there is no signed contract. Unfortunately, that’s “normal”… )
Now I have one less thing to complain about: Fannie Mae (in its infamous and incomprehensible “Addendum”) now agrees to will dewinterize the property after the contract is signed so that the buyer can inspect the property with all the utilities running. This is not exactly a breakthrough at the Paris Peace Talks or anything, but it sure helps.
Previously, the poor buyer had to have a plumber on hand when the property was dewinterized and, more often than not, leaks sprang from every corner of the house. It was a major misadventure just to get the utilities turned on to do an inspection.
Fannie Mae owns more than 50% of all mortgages and there are many foreclosed Fannie Mae homes on the market. This should make it a little easier for buyers to complete Fannie Mae buys without added aggravation.
Here’s the new clause for your reading pleasure:

Investment property: When to file bankruptcy in a short sale or foreclosure

foreclosures-shortsales

Short sales and foreclosures of investment properties are tricky.

Timing is everything. Bankruptcy can be used to discharge the tax issues arising from a foreclosure or short sale, but the window of opportunity slams shut once the lender issues a 1099.

In August 2009, I closed a short sale for a client. Like most short sales, it took forever (about 9 months), but unlike most attempted short sales, this actually closed.

My client bought the townhouse as an investment, not as his residence, in 2005 with the intention of “flipping” it. Well, the real estate market plunged, and not only did he not flip the property, but he couldn’t rent it out either. He somehow stayed current on the payments, listed the property for sale as a short sale and found a buyer.

My client had to pay extra cash to the lender for a “no deficiency” short sale payoff. Even with the amount my client paid, the mortgage payoff to the lender was “short” by $60,000.00.

There are lingering problems with any short sale of investment property. The main tax problem is this:  Even though the short sale payoff was a no deficiency payoff, meaning the lender could not pursue him for the $60,000.00 after closing, the lender issued a 1099C last week to the client for $60,000.00.

Lenders are required by law to issue 1099s by the first week of February in the year after any debt of $600.00 or more is forgiven or written off. There is no way to avoid the 1099. But there are ways to respond to the issuance of a 1099 after a short sale or foreclosure:

1. First, if the property was your primary residence, Form 982 can be filed with the client’s tax return. Under the Mortgage Debt Relief Act of 2007, this amount is excluded from income if the client used the property as a primary residence. In most cases, a short sale or foreclosure of a primary residence will not require a client to file bankruptcy because the income is excluded already and deficiency judgments are rare.

2. Second, if the property is not your primary residence, you can file Form 982 and claim to be “insolvent.” If you are insolvent, meaning your debts exceed assets, then the 1099 income vanishes. You have to include IRAs and retirement accounts as an asset in calculating insolvency, but IRAs and retirement accounts are exempt in bankruptcy, and the client keeps them. In my client’s case, he did claim to be insolvent, which excluded the $60,000.00 from the 1099 from his income.

3. Third, if the property was not your primary residence and you are not insolvent, the client can file a chapter 7 bankruptcy to discharge the debt. But, the bankruptcy must be filed before the 1099 is issued by the lender. Once the 1099 is issued, the forgiven debt turns into income and income cannot be discharged in a bankruptcy. So my client had a window of opportunity to clear the 1099 debt from August 2009 through January 2010 by filing bankruptcy. Filing bankruptcy at any time during that period would get rid of all personal liability for the mortgage, including the 1099 afterward.

I still believe that it is a good idea to pursue a short sale, whether you are selling a primary residence or an investment property, rather than hopping straight to a foreclosure or bankruptcy. But the tax effect of the short sale or foreclosure of any investment property has to be carefully analyzed before the window of opportunity closes and it is too late to file a bankruptcy case.

The cost of probate

Probate, Wills

I am a fan of living trusts. Trusts avoid probate. Probate is not the chamber of horrors that it is sometimes made out to be. But, all things being the same, you are better off side-stepping it  if possible.

In Illinois, probate is not terribly expensive since we do not have a fee schedule that sets mandatory executor’s and attorney’s fees.  Our  probate statute allows ”reasonable” attorney’s fees. Generally, a probate case involves a minimum of two court appearances by the attorney.  Attorney’s fees in a standard probate range from a low of $1500.00 to a high of $3500.00. In addition to the attorney’s fees there are filing fees and costs. Here are the current costs in Cook County for a testate (with a will) probate:

$314.00 Filing fee to Clerk of Court

$180.00 Claims Notice in Newspaper

$20.00 Copies of letters of office

$514.00 Total Costs

Generally, the total cost of a probate (including costs and attorney’s fees) will be as low as $2000.00 or as high as $4000.00. This  would not include any tax advice, adminstration of the assets after the probate is opened or asset transfers. This is just to open and close the estate.

With a living trust, these costs are avoided and the client can go straight to collecting and distributing the assets without the added cost of the probate.  Often, the cost of setting up a living trust is just a little more than the cost of the probate filing fees alone, so it makes sense to skip the probate by using a trust.

Cook Co. 09 senior freeze and homeowner exemption forms are here

Real estate tax

The forms to apply for the Cook County homeowner’s exemption for real estate taxes and for the senior freeze are now available on the Cook County Assessor’s website.

The senior freeze has to be applied for every year and the applicant has to be 65 or older and have an income of less than $55,000.00.

The homeowner’s exemption does not require an annual application. However, anyone who bought real estate in 2008 should fill out the homeowner’s exemption application (one time only) because the homeowner’s exemption drops off after a sale and must be re-applied for after the closing.

Unwelcome surprise: 1099 after foreclosure and short sale

foreclosures-shortsales

There is an unpleasant aftershock from a foreclosure or short sale.

A client received the 1099 below last week after the foreclosure of his home. Lenders will issue a 1099 to the borrower after foreclosure and, surprise, the client will owe income tax on the amount in the 1099. The client was quite distressed to get this in the mail.

The 1099 means that he has $189,385.26 more in taxable income for 2009. That is because when a mortgage is foreclosed, it is deemed to be  “forgiveness of debt” and it is counted as income to the borrower, due to the fact that the borrower does not have to repay the mortgage.

Fortunately, since this was the client’s primary residence and, while he must report the 1099 on his taxes,  he can exclude the 1099 from his income. Form 982 is used to exclude the 1099 from income. This was the client’s primary residence and there is an exclusion for primary residences only (no vacation homes or investment properties get this benefit). Had this not been his primary residences (for any 2 of the last 5 years) he would have owed about $60,000.00 in income taxes, which, of course, was money he did not have.

It is always a good idea for a borrower in financial trouble to try to sell the property at a “short sale” before going through foreclosure. Why? First, in a short sale you can at least pay back some of the mortgage and the amount reported on the 1099 issued after closing by the lender will be less than in a foreclosure. After a foreclosure, the entire amount of the mortgage is 1099’d to the borrower.

As I wrote recently, after a short sale or foreclosure, a lender is required to issue a 1099 for the amount that was not repaid.  The lender can also pursue a deficiency judgment against the borrower.  In Illinois, most lenders on first mortgages are simply issuing 1099s after foreclosures and short sales. They are not seeking deficiency judgments, although they could do so. Technically, the lender can do both of these:  a.) 1099 the borrower and  b.) seek a deficiency judgment, but that rarely happens. In practice, most lenders just issue 1099s and don’t pursue deficiency judgments. However, borrowers have to be aware that the issuance of a 1099 does not cut off  liability for signing the note.

Second mortgages are another story and many of those are being turned over to collection agencies, rather than the lender seeking a deficiency judgment.

Many clients are not aware of the 1099 issue. So the best route if you are in financial trouble with real estate is:

  1. File for a loan modification first (although it’s easier to get hit by lightning than to get this approved). The only reason to do this is the new short sale rules that start soon require a loan modification first, before a short sale.
  2. List the house for sale and try to get the lender to approve short sale.
  3. Ask the lender in the short sale for a “no deficiency” payoff, especially if the property is an investment property.
  4. Beware that a 1099 will be issued after a short sale or foreclosure and file form 982 to exclude the 1099 from your income.
  5. At the worst, if the property was not your primary residence, you will have to file for bankruptcy to get rid of the income from the 1099 after the short sale or foreclosure. However, as this excellent post points out, the bankruptcy has to be filed before the 1099 is issued, not after. A bankruptcy filing after the 1099 is issued will not discharge the 1099 income.

Cook County tax first installment 5% higher

Real estate tax

I got my first installment of 2009 tax bill in my mailbox on Saturday. To be honest, I didn’t even open it. The first installment of taxes was always 50% of the last tax bill. There are no big increases in the first installment. It’s kind of dull.

Many are complaining (rightfully) that the installments are too close together. Another thing to complain about is this: The first installment is now larger than in previous years. It’s now 55% of last year’s tax bill.

Foreclosure and deficiency judgments

Bankruptcy, foreclosures-shortsales, Real estate tax

One sign of a terrible economy,  to me, is how many times per week I discuss with a client how foreclosure works. Clients are worried about foreclosure, but they are especially fearful that the foreclosing lender will obtaining a deficiency judgment against them.  If you check any real estate advice website like Trulia, there are many, many people asking about the effects of foreclosure and how deficiency judgments work. (Update: Illinois courts are now entering deficiency judgments routinely on first mortgages. This post discusses the increase in deficiency judgments.)  Here’s how  deficiency judgments work in Illinois:

Are deficiency judgments allowed in Illinois?

Yes.

What is a deficiency judgment?

If a property is foreclosed, it is sold at a sheriff’s sale. If the property owner owed $100,000 on his mortgage when he was foreclosed, and the property is sold at the sheriff’s sale for $80,000, then the lender can get a deficiency judgment for $20,000.00. This means a court order is entered saying that the owner owes the lender $20,000.00. (As discussed below, obtaining a judgment and actually collecting the judgment are two different things.)

When is a deficiency judgment entered?

Usually, the deficiency judgment is requested in the foreclosure complaint. The judgment is entered at the foreclosure sale confirmation hearing after the sheriff’s  sale at the end of the foreclosure.

Can the lender get a deficiency judgment if I was served by publication in the foreclosure?

No. You have to be personally served by the sheriff or process server. The lender cannot get a deficiency judgment if you were served by publication (as many homeowners are). Another way to get a deficiency judgment entered against you is if you file an “appearance” in the foreclosure case.

What are the chances of the lender coming after me for a deficiency judgment?

If the property was your primary residence, the chances are slim (my  estimate, totally unsupported by facts or statistics, is 5%) that a deficiency judgment will be entered. Very few deficiency judgments are being entered in Cook County according to attorneys I know who practice in the foreclosure area. If the foreclosed property was investment property ,or the mortgage was held by a small local lender, then the chances of a deficiency judgment increase greatly.

What can the lender take from me if they get a deficiency judgment?

A deficiency judgment is like any other judgment that is entered for an unpaid medical bill or unpaid credit card. After the judgment is entered,  the judgment holder serves you with a “citation to discover assets” and you have to go to court and produce a copy of your tax return and a list of your assets.  They use this information to garnish your wages or to take any non-exempt assets from you to pay the judgment.

What assets are exempt from collection after a deficiency judgment?

These items are exempt from judgment:  Life insurance, 401ks, IRAs, $15,000 in equity in a house ($30,000 for a married couple). If your house is titled as Tenancy by the Entirety (married couples and primary residence only) and provided the judgment is only against one, not both, of a married couple, then the entire house would be exempt.  Since we are talking about a foreclosure, it is unlikely that the judgment debtor will even have a house to worry about.  85% of wages are exempt from garnishment too.

How can I get rid of a deficiency judgment?

The only way to get rid of a deficiency judgment is to file a chapter 7 or chapter 13 bankruptcy. A chapter 7 wipes it out altogether. In a chapter 13, it is partially repaid.

Can’t I just give my other assets to my relative to hold for me?

You can gift assets to a relative. But any transfer to a relative or anyone else that is not “for value” can be undone as a fraudulent transfer.  Transfers to relatives are especially suspect. In addition, there is the risk that your relative will not repay you or may get divorced or file his or her own bankruptcy.

If my lender does not ask for a deficiency judgment in the foreclosure, can my lender file suit against me for a deficiency judgment after the foreclosure?

Yes, Illinois law specifically allows a lender to file suit against a borrower after a foreclosure as a separate collection lawsuit.  With first mortgages, this is very rare and most likely will not happen, unless the lender is a small bank or the property was not your primary residence. Some lenders holding foreclosed second mortgages (especially Citibank and Wells Fargo) now hand over the loans to collection agencies to file a separate lawsuit against the homeowner for breach of contract. Read more about that here.

Can my lender file suit against me for a deficiency judgment after I sell my house in a short sale?

Yes. The best practice is to negotiate a “no deficiency”  provision in your short sale.  If you can’t  get that from the lender, then you will have to wait it out and hope that the lender does not ask for a deficiency judgment in the future. Most likely they will not pursue the borrower, but you never know for sure.

If I deed my property back to my lender in a “deed in lieu of foreclosure” can my lender get a deficiency judgment against me later?

No. The lender cannot get a deficiency judgment. Unfortunately,  a deed in lieu of foreclosure is kind of the equivalent of a unicorn; one doesn’t exactly show up in your back yard every day.

How long is a deficiency judgment last?

A judgment in Illinois is valid for 7 years from the date it is entered.

I’ve heard that in a foreclosure my lender can 1099 me for “forgiveness of debt.” Can they 1099 me and get a deficiency judgment against me too?

Usually, if a lender 1099s you, the lender will not seek a deficiency judgment. This is just how lenders operate, not the law.  By law, the lender must issue a 1099 after a foreclosure or short sale. The issuance of the 1099 does not mean that the debt is erased by the lender. It just means that the forgiven debt is taxable to you.

If the lender 1099s you and later seeks a deficiency judgment, the lender would have to issue a revised 1099, that’s all. So the issuance of a 1099 does not bar a deficiency judgment. Technically, the lender can 1099 you AND file for a deficiency judgment. You have to keep in mind that the lender could still get a deficiency judgment after a 1099 is issued. The only sure elimination of both the 1099 and deficiency judgment is to file bankruptcy before the 1099 is issued.

There are several cases that deal with this topic: In re Zaika, a PA bankruptcy court case  and AmTrust v. Fossett in AZ are a couple that summarize the law.

If the foreclosed property was your primary residence,then you have no income from the 1099 by law under the Mortgage Debt Forgiveness Act. If the property was not your primary residence, then you will have phantom income from the 1099 to deal with.

Best “cloud” programs

Technology

It’s become common to have computer programs hosted in the “cloud.” My favorite cloud programs are below:

(I use and like gmail, google calendar a google tasks alot, but they are so well-known I left them out)

  • Dropbox. I love this program. Any file that is saved in My Dropbox (which is just a folder in the My Documents area) is synched with all other computers. I synch all of my files on 3 computers and my I phone. I can access any of these files from any or all of these, including the I phone, anywhere there is internet access. The dropbox  interface is clean and easy to understand. This program is a total winner. It’s free too, up to 3 GB of storage. I pay for the $99 yearly upgrade to store 50 GB.
  • Dragon I phone application. I use Nuance’s Dragon voice dictation system on my main computer at work, although not as much as I used to. In December, the company released a free Iphone  application that lets you dictate into the I phone and then you can email or text the resulting message. It’s a big time saver and provides a break from the tyranny of typing messages into the I phone. It recognizes speech very well.
  • Timedriver. This is my second favorite program. Timedriver lets clients make appointments without playing phone tag forever. I have a link on my website that the client clicks. The client chooses a time and date and then the appointment is put in my Google calendar automatically. The cost of this is $30 per year and it’s worth 10 times that amount.
  • Basecamp. This is an extranet program that I have used for three years for active real estate and trust and estate planning matters. It is phenomenal and costs only $49/mo. Clients are notified by email if a new file or email is posted to their private extranet. File sharing and email sharing are made simple with Basecamp.
  • Highrise. I used ACT contact manager for years. ACT had a bloated upgrade every year and had too many features for my humble office, so I switched to Highrise about three years ago. It is $24.00 per month and is a basic, utilitarian contact manager for storing notes, email and data about a client, but it works for me.
  • Authorize.net.  I ‘ve  accepted credit cards from clients for years. Last year I got rid of my account with Moneris and my expensive card-swiping machine. I applied for an authorize.net account using powerpay.biz. This is an internet payment gateway that allows me to accept credit cards online. I no longer have a card swiping machine. I can take credit cards on my Iphone, but I generally use Freshbooks, described below, to email an invoice to a client and the client pays by credit card online. Works wonderfully.
  • Freshbooks. Freshbooks is a time-tracking and invoicing program. I used Quickbooks for invoicing for years, but once I tried Freshbooks I never went back to Quickbooks (for invoicing that is; I still use it as a basic accounting program). With Freshbooks, you can send invoices by email to the client and the client can either print the invoice and mail a check, or pay by credit card online (you need an authorize.net account for this feature to work). The interface is clean and easy to use. I pay about $20/month and it’s well worth it.
  • Evernote. Evernote is a free program that lets you capture clips of websites. This replaced delicious for me and I use it to bookmark sites. There is an easy-to-use Firefox add-on that lets you capture any site in a single click. The best part about it is the Iphone application that remembers all of the sites for easy access anywhere.
  • Jungledisk. This is a good file backup site. You pay only for what you upload to the site and it’s worked well for me so far. Once you select the files or folders that you want to backup, the software takes care of it for you every day.