Real Estate Mailbag
Q DEAR BOB: My wife and I are planning a trip soon and don't have time to prepare a living trust through a lawyer. Instead, we bought a living-trust kit to prepare our own. We have three beneficiaries and plan to list in the will our home in Idaho, plus another home under construction in California. We plan to have our document notarized before we leave on our trip. If we should both die on the trip, we have instructed the trustee, our daughter, to sell the homes and distribute the net proceeds to her daughter and her brother, as detailed in the living trust. Can our beneficiaries be our trustees? Will listing our major assets in this living trust and having the document notarized be sufficient? -- Glenn M.
ADEAR GLENN: Your description indicates you have created a worthless living trust. You must transfer the titles to your major assets, such as those two homes, from yourselves to yourselves as trustees of your joint living trust. This is known as funding the trust. If you both die on your trip, your beneficiaries will have to probate your estates in Idaho and California, where you are building another house, unless the state probate exemption for a small estate applies.
I hope you and your wife have up-to-date wills to be probated in court if you die, because your empty living trust won't avoid probate costs and delays. Your living-trust beneficiaries can also be named as the alternate or successor trustees of your living trust to take over after you and your wife pass on.
DEAR BOB: I have been a real estate agent for 18 years and I used to recommend my sellers provide one-year home warranty policies to their buyers. This was a great sales inducement for buyers, but a few years ago most of the home warranty companies started refusing to pay valid claims for residence components that failed shortly after home purchase, such as furnaces, air conditioners, appliances and water heaters. The main warranty company excuses for not paying are pre-existing conditions and seller's failure to maintain the equipment. I have learned there is almost no state insurance regulation of these home warranty companies. I no longer recommend these home warranty policies because they pay claims so rarely. -- Shirley R.
DEAR SHIRLEY: Thank you for your insight. You hear from your buyers and sellers about the many home warranty claims that the insurers deny. Personally, I have had no problem obtaining payments on one-year home warranty policy claims. All I had to pay was the $50 per-claim service fee. However, I haven't had a claim in the last few years and I understand the warranty companies have recently become much more hostile toward claimants.
DEAR BOB: Almost 20 years ago, my wife and I bought our second home. We and our three children have enjoyed many happy times there, but we find our use declines year by year. Last year we had a burglary, which made us think that maybe it's time to sell. Local real estate agents tell us they can easily sell "in a heartbeat" for a price that will give us about $300,000 profit. However, your recent article said there is no easy way to avoid tax on a vacation-home sale. If we rent the vacation home to tenants, how long must they rent before we can qualify for an Internal Revenue Code 1031 tax-deferred exchange? -- Ryan R.
DEAR RYAN: I recently asked your question of an IRS official in Washington, whose "official reply" was: "The IRS does not wish to provide guidance on your question." He said questions such as yours about tax-deferred exchanges are frequently asked of the IRS, but there is no minimum rental time specified in IRC 1031 or the regulations to qualify a property for a tax-deferred exchange. Consult a tax adviser for details.
DEAR BOB: What is your opinion about the new option-payment mortgages, where the homeowner can pay either interest only, a 30-year fully amortized monthly payment, or any amount in between? -- Bryan T.
DEAR BRYAN: The answer depends on how long you expect to own your house. If you plan to stay forever, I suggest paying the fully amortized monthly payment. However, if you expect to sell your home within a few years, then the interest-only option is beneficial because your monthly payment is at the minimum level and it is fully tax-deductible interest.
Watch out for a few of these new mortgages that sound attractive but have "negative amortization." That means the monthly minimum payment remains fixed for a specified time, such as six months or a year, but the interest rate changes monthly. The result of a "negative am" mortgage can be that the unpaid interest is added to the mortgage principal so you owe more than you originally borrowed.
DEAR BOB: In your recent column you advised a borrower to get pre-approved for a home loan before shopping for a home and then "keep looking for a better mortgage deal." As a mortgage broker, I put a lot of time into working with prospective home buyers to find them the best mortgage program for their pre-approval. Once this work is done, it is easy for another broker or lender to trim their profit margin and underbid to buy the business. Borrowers should do their loan shopping up front and then stick with their mortgage broker or lender unless they have a good reason to switch.
-- Jim W.