The best way to protect inheritances

Bankruptcy, Estate Planning, Living Trusts
If you leave money outright to your children or heirs, the inheritance can be lost by your heirs in several ways: Divorce, creditors or bankruptcy are the main culprits.

There’s a simple way to avoid this and to protect the heir from him or herself.

In the trusts that I prepare, most clients choose to leave the inheritance in a “flexible protective trust.” This is  fancy name for a “spendthrift trust.” Usually, a flexible protective trust leaves it up to the child/heir to decide whether to withdraw the funds ( if the coast is clear) or leave the funds in the trust where the inheritance is protected.

Inherited money that the child leaves in a flexible protective trust cannot be taken in the child’s divorce, cannot be attached by child’s creditor and it is exempt is bankruptcy, meaning the child will not lose the inherited money if he files bankruptcy.

A recent bankruptcy court case, In re Lunkes,  illustrates that there is really no reason to leave an inheritance directly to a child or heir. It is always better to play it safe and at least set up a flexible protective trust and let the heir decide if it should be protected within the trust or not.

In the Lunkes case, a parent died and left money to the children, but the funds were left outright, not in a flexible protective trust. One of the kids filed a chapter 7 bankruptcy and claimed that the inheritance was exempt, and that he should be able to keep the inheritance. The kid’s argument was that, hey… the funds are still being administered in the trust (there was a lot of real estate that now takes an eternity to liquidate) so since I don’t have the inheritance yet, it can’t be taken away in the bankruptcy. The court said, sorry, the funds were left outright to the child, not in a flexible protective trust, so the inheritance goes to the bankruptcy trustee. This could have easily been avoided by using a flexible protective trust. Inherited money left in a flexible protective trust is exempt in bankruptcy (meaning the child/heir gets to keep the inheritance).

There are only three rules to for setting up a flexible protective trust:

1. The funds have to be held in trust, not left outright.
2. The child/heir cannot be the trustee.
3. The trust has to contain a spendthrift clause. Most trusts contain these.  An Illinois spendthrift clause reads like this:  “No interest under this instrument shall be assignable by any beneficiary, or be subject to the claims of his or her creditors, including claims for alimony or separate maintenance. The preceding sentence shall not be construed as restricting in any way the exercise of any right of withdrawal or power of appointment or the ability of any beneficiary to release his or her interest.”

The truth is that very few heirs are going to actually leave the inherited money in the trust. But it’s best to give them the option, right?  I don’t charge any extra fees for drafting a flexible protective trust provision. It’s very easy to do. It’s my default, go-to way to distribute to the heirs in 99% of trusts that I draft.

So, do your heirs a favor and at least give them the option of protecting their inheritance in a flexible protective trust.

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Real estate.. there’s an app for that

Real Estate-Purchases, Real Estate-Sales

The internet is changing (for the better) the way people shop for and view real estate.

There is an new Iphone app that allows you to search listings from your Iphone. The nice thing about this app is that the GPS in the phone senses were you are located and will automatically map listings near you. Or you can search specific addresses. Then it shows you detailed listing with plenty of pics.

I have been playing around with it and it works very well.

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Can student loans be discharged in bankruptcy?

Bankruptcy

Just this week, I’ve talked with three prospective clients who want to try to discharge student loans in bankruptcy.

I don’t like delivering bad news, but it’s close to impossible to get rid of student loans by filing a bankruptcy.

Before 2005, private student loans were dischargeable in bankruptcy. Since then, very few federal, state or private student loans were able to be cleared with a bankruptcy.

Here’s an example of how hard it is to discharge a student loan: In 2008, there were 72,000 student loan borrowers in bankruptcy. A whopping 29 of those had their student loans discharged. Those are not great odds.

The bankruptcy courts require you to show “undue hardship” to get rid of a student loan. This means that a separate motion has to be brought before the judge and you have to show you made an effort to pay the loan and that continuing to pay it would mean that you couldn’t afford basic living expenses.

Nationally, the amount of student loan debt now surpasses credit card debt!

There is a proposed law in Congress that would allow private student loans to be discharged in bankruptcy. Here’s an interesting discussion of that proposal. I would not hold my breath waiting for this to pass.

The only remedy available for those in trouble on student loans is to file a chapter 13 bankruptcy. This will consolidate the loans and will stop interest and penalties. To do this, you need an income. Beyond income, you need what is called discretionary income, that is some money left to pay creditors after your basic expenses, to file a chapter 13.

For now, if you take out a student loan you are pretty much stuck with it, unless you qualify to file a chapter 13 bankruptcy.

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Is Wells Fargo easy on short sales?

foreclosures-shortsales

Image: jscreationzs / FreeDigitalPhotos.net

An urban myth spread through my son’s school that gangs were putting baby seats on the roadside with blankets over the car seats and when an unsuspecting soccer mom stopped by to help out, the gang supposedly would rob the mom. This turned out to be totally untrue, of course.

An urban myth in real estate circles is that Wells Fargo is easy to work with on short sales. This is not true either.

Wells is not 100% horrible to deal with on short sales, but it’s not easy either. I am not saying that they are any worse than other lenders in short sales, just that they are not as smooth as everyone says.

Last week, I closed a short sale with Wells and here’s is how it went:

Short sale Property: Condo in Cary IL bought in 2007 and close to foreclosure (seller several months behind on payments).

Negotiator. The negotiator was appointed pretty quickly, within a few weeks. The negotiator communicated by email only. There were no phone calls. Matt Hernacki of Misterhomes Real Estate in Palatine, IL submitted the short sale package and he dealt with the negotiator, which was all done by email. Matt does a good job of  patiently, but persistently, dealing with short sale lenders. That’s an important first step in getting a short sale approved.

General word of caution: If you get up in the grill of a short sale negotiator and demand to speak to his supervisor, lecture him and impress him with your encyclopedic short sale knowledge, you are a dead man my friend. Your file is going nowhere.

BPO Haggling: Wells immediately insisted that the purchase price of $126,000 was too low. So right away, Wells asked to increase the price by $11,000! The broker price opinion (BPO) done by the lender was about 90 days old and was clearly wrong.

We thought the buyer would run for the hills when asked to increase the price by that much. The seller had no funds to contribute. But the buyer quickly agreed to increase the price by $4000.00 to $130,000.00. This was the first sign that we had a good buyer on our hands.

The lender accepted the $4000.00 purchase price increase, but kept whining that it was below guidelines. I find that very few buyers will increase the price by more than $2000.00.

Short sale Buyers are fickle: Many short sales buyers cancel the contract within 45 days of signing it. In this case, the buyer was obviously committed to buying this condo, which made things much easier. This buyer got fully, unconditionally  approved right away, which was awesome.

Most buyers of short sales don’t even start their loan application until the short sale is approved. This creates a Catch 22, because short sale approvals are valid for anywhere from two weeks to 30 days. The short sale approval often expires before the buyer gets his loan approval and the short sale has to be extended several times. This means all of the figures like tax credits and condo dues will have to be redone and resubmitted and the file will linger forever.

Number of Closing Extensions and Riders: There were five riders signed: One rider to change the purchase price and 4 closing extension date riders. Wells Fargo is absolutely obsessed with closing date extension riders. Most short sales just dink along and you close whenever the short sale and buyer’s loan are approved. Every time we got close to or passed the “closing date” we had to sign another closing date extension rider and send it to Wells.

Promissory note or seller contribution: Lender did not ask for either.

Time to closing: 3 months

Bizarre Final HUD approval takes days: Wells Fargo approves the short sale and issues a short sale approval letter that has all of the allowed closing costs and the “net” figure that it expects to receive. Be careful, though, that because Wells requires final approval of the HUD-1 in addition to the short sale approval. The final closing figures have to be submitted to them 48 hours prior to closing for a separate approval of the HUD-1. We submitted the figures mid-day on Thursday. The closing was Friday. The HUD was not approved until 5 pm on Monday. So it took 4 days for HUD approval. That’s insane especially since all of the figures were the same as the short sale approval letter. The crabby HUD-approver wanted the seller’s forwarding address changed and a couple other micro-managed things changed. Hud-approvers don’t accept calls; they only email. She kept sending back emails saying this:

What you need, ultimately, is a PDF stamp on the HUD saying it’s approved, like this:

This whole HUD approval step is absolutely unnecessary. It  takes so long that it could threaten the closing because the buyer’s lender usually wants to disburse the loan by no later than the day after closing.

Be prepared for this last stage and stay on top of your Hud-approver.  And beware of the myth that Wells is easy on short sales.

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FHA may tag Strategic Defaulters with Scarlet S for life

foreclosures-shortsales, Strategic Default

Okay, foreclosures are up 95% this year in Palatine, the town where I live.

The high foreclosure rate in Palatine is because there are a lot of condos here. Many condos were purchased around or after the peak in June 2006.

I would bet that more than half of those condo foreclosures were “strategic defaults” meaning the buyer could continue paying, but chose to walk away from the property. In talking with clients it’s clear that no one defaults on their mortgage without a lot of thought, lack of sleep and anxiety. People care about their property and their credit rating and don’t just decide to descend into a foreclosure for the fun of it.

The lending industry is pressuring Congress now to discipline homeowner’s who have committed the sin of strategic default by limiting their ability to get a mortgage in the future. This excellent post by attorney Steve Beebe explains that Fannie Mae is trying to prohibit those who walked away from their home from getting a new mortgage for 7 years.

Worse yet, a new law being proposed and already passed by the House, called the FHA Reform Act, would prohibit strategic defaulters from getting any FHA mortgage in the future. Most homeowners who go through a foreclosure try to get an FHA mortgage two to five years after their foreclosure because FHAs have a low 3.5% downpayment and relaxed credit requirements of around 640 FICO.

It’s absolutely insane to ban people for life from getting an FHA mortgage.

First, how does one define strategic default? I don’t think lenders should be allowed to decide which unworthy Hester Prynnes get tagged with the scarlet “S” for strategic defaulter.

Second, the government, other than the tax credits that just expired, has done nothing to help the homeowners in or near default. The HAMP loan modification program is considered a joke and a failure.

This is really all about lenders trying to quell the non-stop wave of foreclosures by intimidating current mortgage holders into keeping, and not defaulting on, their homes, many of which are worth far less than the mortgage amount.

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Watch mail for Cook Co. suburban tax reassessments

Real estate tax

Every three years, Cook County does the triennial reassessment of real estate tax bills.

Notices were just mailed to Barrington township. Evanston township notices were mailed July 15, 2010 and Barrington on July 8, 2010. These will be followed shortly by notices sent to other northwest suburban townships like Palatine, Schaumburg, Wheeling and Elk Grove.

Why does this matter?

Because this will be your only chance to protest your taxes for the next three years, that’s why.

The key thing here is to watch your mail for the reassessment notice because you only have 30 days from the date the reassessment notice is sent to protest your assessment.

The new assessments will affect the 2010 tax bill issued in the Fall of 2011.

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Tax credit extended to September 30

Real Estate Tax Credit, Real Estate-Purchases

Congress finally approved an extension of the first-time and move-up buyer tax credits ($8000.00 and $6500.00 respectively) to September 30, 2010. This only applies to those who already signed a contract by April 30, 2010.

I have very few clients who will be affected by this.

I guess it’s good to help out those unfortunate souls who got sucked down some mortgage underwriting vortex and ended up with delayed closings.

I will so miss the tax credit.  I loved the credit with all my heart. It was an awesome, effective stimulus to a dead real estate market. The problem is how do we live without it?

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