QDEAR BOB: My best friend's husband died almost two years ago and his estate is still tied up in probate court. She barely can get by on Social Security and a little other income until the probate mess is cleared up. I suggested a reverse mortgage, but she can't get one because the title to the home she owned with her husband is involved in the probate. My friend told me she wished they had a living trust to avoid probate. What is a living trust? How does it avoid probate? Should my husband and I have a living trust? -- Margarite W.

ADEAR MARGARITE: Revocable living trusts have two prime advantages.

The first is avoiding probate costs and delays, such as your friend is encountering.

The second occurs if the living trust trustor becomes incompetent, such as with Alzheimer's disease. Then the co-trustee or successor trustee can take over and manage the living trust assets, such as stocks, bonds and real estate.

Until the trustor dies or becomes incompetent, he or she can buy, sell and manage the assets as before.

There's only one disadvantage: the cost of establishing a living trust. I've seen lawyers advertise that a trust can be set up for as little as $395, but most lawyers charge $1,000 to $2,000, including transfer of realty titles into the trust. However, the fee is usually far less than it would cost to go through probate when the owner dies.

DEAR BOB: Why don't you warn home buyers that they should get an owner's title insurance policy? Almost two years ago, we bought a brand-new house. The builder arranged our mortgage and details of the title transfer. Our big benefit was "no closing costs." We were thrilled to buy our first home for little cash.

But a few months later, trouble began. The builder apparently didn't pay his subcontractors. They foreclosed on their mechanic's liens. The title insurer paid off the mortgage company. However, we lost title to our home because we didn't have an owner's title insurance policy. Our credit was ruined because we stopped making mortgage payments when we learned of the mess. -- Andrew G.

DEAR ANDREW: There are two types of title insurance. One is a lender's title policy, which virtually all mortgage lenders insist upon receiving. Your builder probably paid for that policy, which doesn't protect borrowers.

The other type is an owner's policy to protect your equity from title risk loss, such as mechanic's lien foreclosure. Every real estate buyer should obtain an owner's title insurance policy. Your situation shows how, for a modest premium, you could have avoided a costly title loss.

DEAR BOB: When I bought my home about two years ago, I financed it with a Federal Housing Administration mortgage. The real estate agent arranged a so-called "professional inspection." The only defects were a small section of fascia, which was rotted, and an electrical junction box. After they were repaired, the house passed FHA inspection.

In May 2002 I hired a gutter company to replace the gutters. When they finished, they told me there were several soft spots on my roof. I had three roofers inspect the roof. All said the roof never should have passed inspection as it had been in need of repair long before I purchased the house.

Now I'm getting the roof fixed at a cost of more than $5,000. I contacted the brokerage that sold me the house because I later learned the recommended inspector was a real estate broker at the time. I checked at city hall and learned that in 1992, the previous owner took out a roof repair permit and the inspector noted the roof was in bad condition then. The multiple listing service listing for my home said "newer roof."

Do I have any recourse against the inspector, seller or the real estate agent -- Janice B.

DEAR JANICE: Your situation shows why buyers should hire only reputable professional inspectors. I recommend members of the American Society of Home Inspectors, which has a Web site at www.ashi.com. ASHI has the toughest inspection requirements.

An FHA inspection is not a substitute for your own professional inspection.

The realty agent who sold the home to you should not have recommended an unqualified professional inspector. Unfortunately, home inspectors are not strictly regulated. And if the roof was not leaking at the time of the home sale, you probably have no recourse against the professional inspector, the seller or the realty agent.

DEAR BOB: I am a widow, 72, living on Social Security and a modest pension. But I never seem to have enough money in my bank account. Sometimes I run up my credit cards, but I owe only about $2,000 on them now. However, I own my home free and clear. It's nice not to have any mortgage payments.

My daughter showed me one of your articles about reverse mortgages. She suggests I get a reverse mortgage to pay off my credit cards and buy a newer car. I talked with a reverse-mortgage agent, but the costs seem so high. Are there any other reverse-

mortgage disadvantages? -- Ellen H.

DEAR ELLEN: If you plan to stay in your home at least five years, a reverse mortgage can be a good deal. However, if you are in poor health or plan to move in a year or two, a reverse mortgage can be expensive, in percentage terms.

A reverse mortgage is a great way to put your idle home equity to work so you can enjoy it. Most seniors with reverse mortgages select the credit line option. Or you can choose to take a lump sum to perhaps buy a car or take a trip to Tahiti, with a credit line for other needs as they arise. Another choice is to take a lump sum now, plus monthly lifetime payments to you.

Although not exactly a disadvantage, taking out a reverse mortgage will be spending the inheritance that would otherwise go to your heirs. But there is nothing in the Bible or elsewhere that says, "Thou shalt leave a huge inheritance to thy heirs and live with less than adequate cash resources in thy old age."

DEAR BOB: Until about a year ago, we lived in our condo for nine years. Then we moved to our retirement home, which was our former vacation home. We wanted to see if we liked living there year-round. Our new small-town lifestyle seems to suit us fine, so now we want to sell our condo, which is rented to tenants. They want to buy it. However, our tax adviser says we won't qualify for that $250,000 home-sale tax exemption because we converted our condo into a rental. Is this correct? -- Ted and Cheryl R.

DEAR TED AND CHERYL: No. Internal Revenue Code 121 provides up to a $250,000 tax exemption (up to $500,000 for a married couple filing jointly) on the profits from the sale of a principal residence. To qualify, you must have owned and lived in your primary home an aggregate of two of the five years before its sale. The two years need not be continuous.

It appears you qualify for this tax break. For full details, consult a new tax adviser.

DEAR BOB: We inherited a combination business and residence property. On the first floor is a restaurant. On the second floor are two apartments. The property has a mortgage with a balloon payment coming due in about a year. So we are trying to refinance. But we can't find a mortgage company willing to offer a loan on a combination business-residence property. Any suggestions? -- Maurice S.

DEAR MAURICE: Not many mortgage lenders will lend on such a property. An alternative is to look for a "portfolio lender," one that will keep the loan in its portfolio and not sell it in the secondary mortgage market. The bank where you already do business is a great place to start.

Another alternative is to go to an experienced mortgage broker. Such a person should have contacts with lenders that make unusual loans. However, don't expect the lowest interest rate. There won't be much competition among lenders for your loan.

DEAR BOB: I recall reading in your column how to get rid of private mortgage insurance. That inspired my wife and me to try again to cancel our monthly PMI payment of $72.

We contacted our lender and were told again that our loan-to-value ratio must be below 78 percent. Based on recent sales prices of similar homes in our subdivision neighborhood, we estimate we are at about 70 percent. Then our lender told us we must have had an on-time payment record for at least 24 months. As our mortgage is only 14 months old, that's impossible.

Our large increase in home equity is because of appreciation in market value and our adding a family room and patio. As our interest rate is 6.5 percent, we would like to keep our loan and not have to refinance. Isn't there a federal law on this? Is there any way to get rid of our PMI, which seems like a total rip-off?

-- Angelo H.

DEAR ANGELO: Your obvious alternative is to refinance with another lender to get rid of your PMI., but refinancing is a hassle.

You are correct that the $72 monthly PMI premium is a rip-off .

Yes, there is an ineffective federal law requiring mortgage lenders to cancel PMI automatically on home loans originated after July 29, 1999, when their loan-to-value ratio declines to 78 percent. However, for most home loans, this won't occur until about the 10th year of the mortgage.

It appears that you have an uncooperative lender or loan servicer. A technique successfully used by several readers is to hire a licensed appraiser to confirm that you have more than 20 percent home equity. If you find you do, pay each monthly PMI payment, but after each one, sue your loan servicer in small-claims court for a refund. After a month or two of that, most loan servicers cancel the PMI.

DEAR BOB: You have probably answered this question before, but I must have missed it. If I don't have a living trust, will my real estate assets go into probate court? I own three rental houses, plus my main residence. I hold my titles in joint tenancy with my son. Will this avoid probate? -- Agnes W.

DEAR AGNES: Joint tenancy with right of survivorship is a great way to avoid probate costs and delays. All a surviving joint tenant usually needs to do is record a certified copy of the death certificate and an affidavit of survivorship.

However, suppose you and your son die at the same time, such as in a plane or auto crash. Then your wills would determine who receives the properties. Probate would then usually be necessary.

To avoid this problem, you need a living trust to specify whom you want to receive your assets when you die. Be sure to deed your assets into the living trust. This is called "funding the living trust." For details, consult a lawyer specializing in living trusts.

DEAR BOB: When we moved into our current residence about 12 years ago, we rented out our former home. It has been our greatest investment because it appreciated handsomely in market value. However, we plan to move away from the area for retirement.

Our long-time tenants want to buy the rental house, and we want to sell it to them. Our attorney suggests we do a "Starker exchange" to avoid tax on the profit and acquire investment property near our new location in Florida. What do you think about Starker exchanges to avoid tax? -- Evelyn H.

DEAR EVELYN: Internal Revenue Code 1031(a)(3) Starker tax-deferred "delayed" exchanges are virtually the only way to sell your rental house and avoid tax.

To qualify for tax deferral, you must purchase a replacement "like kind" rental or business property of equal or greater cost and equity. A potential drawback is that you must designate the qualifying replacement property within 45 days after closing the rental house sale and complete the acquisition within 180 days.

DEAR BOB: My wife and I bought our home in 1993 for $420,000. She died in July 2000. The house is now worth about $700,000. I plan to sell it in the near future and move to a smaller home. How will my capital gains and that $250,000 exemption apply? -- Joseph B.

DEAR JOSEPH: When your wife died and you inherited her share of the home, you received a new stepped-up basis equal to its market value at that time. How you both held title makes a difference, too, but that's another issue.

If you net $700,000 when you sell your principal residence and subtract the $250,000 Internal Revenue 121 tax exemption, then your revised home sales price drops to $450,000. Of course, that's presuming you qualify for IRC 121 by having owned and lived in the home an aggregate of at least two of the five years before its sale.

As a result of your increased stepped-up basis, which is probably higher than $450,000 unless all of the increase in value came in the last two years, it appears you will owe no capital gains tax. Consult a tax adviser to work out the exact calculation.

Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128, or contact him via e-mail at robertjbruss@aol.com.

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