DEAR BENNY: What impact will a short sale have on my credit rating? Will it be better for me to let the property go to foreclosure? –Kristine
DEAR KRISTINE: That’s a tough question to answer because, to my knowledge, the various credit rating agencies have different approaches to determining ratings. More significantly, once you start falling behind on your monthly mortgage payments, your credit rating is already falling, so its difficult to separate the bad credit from the impact of a short sale.
One of the most prominent credit reporting companies that mortgage lenders rely on is known as FICO — formerly known as Fair Isaac Corp. In March 2011, under the heading "Research looks at how mortgage delinquencies affect scores," some interesting statistics were presented. To summarize:
- there is no significant difference in score impact between a short sale, deed-in-lieu or foreclosure;
- in general, the higher your score before you have financial problems, the longer it will take to fully recover; and
- while a score may begin to improve in the short run, it could take approximately seven to 10 years to fully recover, assuming you are current with all other debt obligations.
The full study is reported at bankinganalyticsblog.fico.com.
DEAR BENNY: I am an estate planning and tax attorney in Chicago and read your solicitation for additional suggestions regarding your reader who asked about giving a home to his aunt. Here are a few thoughts.
First, you are correct that the Internal Revenue Service would likely not respect the reader’s plan to make annual exclusion gifts of interests in the home to 35 people who would then each gift the interest to the aunt. The IRS would probably view this as a gift of the entire home directly to the reader’s aunt on several possible theories.
There are several possible strategies for the reader to gift the residence to his aunt.
1. He could sell the property to his aunt in exchange for a promissory note and forgive the note over time as a gift. Generally, the IRS will respect this arrangement only if the transaction and debt is bona fide and there is no express or implied agreement that the reader will forgive the debt.
The reader would likely want to give the residence and the promissory note to his aunt under his will or trust. If he died before the debt was fully satisfied, his executor would probably have the duty to collect the debt. Also, the value of the remaining debt would be includible in his taxable estate.
2. If the reader could establish the home as his second home, he may be able to use a qualified personal residence trust ("QPRT") to gift the residence to his aunt. Basically, the reader would transfer the residence to a trust. The typical trust would provide full use of the residence to the reader for a period of years, and then would transfer the residence to the reader’s aunt after the period.
The reader would be treated as having made a gift to his aunt, but the gift would be less than the fair market value of the home because the reader would retain the value of that initial period of use. During the period while the reader has the right to use the home, he may be able to lease it to his aunt.
3. The reader could just give the residence to his aunt. Much would depend upon the reader’s personal wealth, future wealth and estate planning picture. However, assuming no prior taxable gifts, a gift of $460,000 or so to his aunt would not require the reader to actually pay gift tax.
He would be required to file a gift tax return, but the reader (and everyone for that matter) has a $5 million lifetime gift tax credit (at least through 2012) that allows the reader to give up to $5 million in lifetime gifts (not including annual exclusion gifts) and not pay gift tax currently.
4. The reader could keep the residence and lease it to his aunt. Why is it so important that the aunt be given the home if there is a clear understanding that she can live in it? If the reader leases the home to his aunt, he might generate a tax loss for himself while doing a good deed by allowing his aunt to live in the home at her leisure. He could even forgive some of the fair market rent as a gift each year.
Employing any of these strategies would obviously require a more thorough understanding of the reader’s personal tax situation, wealth and other factors. –Clint
DEAR CLINT: Many thanks for the helpful suggestions. As my readers can see, there are many creative ways to resolve complex issues, and it always pays to discuss your specific issues with your own tax and legal advisers.
People like Clint and me can provide only general advice and information to the general public; attorneys and tax advisers can review your specific situation and tailor their advice based on that information.
DEAR BENNY: Four years ago, at our lawyer’s recommendation, he drew up an irrevocable trust for us. Our home would then be excluded from our assets if we were forced into a nursing home. Apparently, that’s based on New York state law. However, after reading your recent column about having one’s daughter inherit the parent’s home, we feel that was a mistake.
Do we have any recourse? If so, what should we do? We are 79 and 87 and would appreciate your advice on how to proceed. Our home was in both our names, but now it is in our two sons’ names. –Marie
DEAR MARIE: It appears that the lawyers you consulted were advising you how to keep your home from being counted as an asset for purposes of Medicaid qualification. These rules are state-specific and can be complicated. I cannot comment on this because I do not know New York law.
Generally, by putting a house in an irrevocable trust, this puts the asset out of your control and out of your list of assets. There is a five-year look-back rule that must be surpassed before the property is considered not "countable."
It should be noted that if any reader is contemplating this approach, it is mandatory to seek counsel with an experienced "elder law" attorney.
Finally, I am not sure that your attorney’s advice was wrong. I suggest you talk to another New York lawyer. Generally, irrevocable transfers are just that, but in some circumstances where the transfer is to a trust, the trust may be able to be terminated with consent of all parties.
DEAR BENNY: My husband passed away recently. I need to know what to do and where to go to have his name taken off the title to our house. It’s in both our names and he left a will stating everything goes to me. Can I do this myself, as money is pretty short now? I would very much appreciate what you can tell me on this matter. –Marcie
DEAR MARCIE: My condolences on your loss. The very first thing you have to determine is how you and your husband held title to your house. If it was as "tenants by the entirety," or joint tenants with rights of survivorship, that means that you and your husband owned the property jointly and that when one of you died, the entire property was then owned by the survivor. No probate is required. Title transfers "by operation of law."
While you can take steps to remove his name, since you own the entire property, it really does not make a difference whether you do that or not. If and when you go to sell the house, all you will need is a certified true copy of the death certificate.
If, on the other hand, the property was titled as "tenants in common," that means that you owned a percentage of the house (usually 50-50) and your husband owned a percentage. In this case, you will have to probate your husband’s estate, although state laws differ on how difficult this will be.
I know you don’t want to spend a lot of money. You may be able to determine how title was held by going to the local recorder of deeds office. In many jurisdictions, this information can actually be found online. But it would pay to buy an hour or two of an attorney’s time to (1) check the status of title and (2) give you advice on your next steps.
You may also want to consult a financial adviser to assist you now that you are alone. You want to make sure that any and all assets are accounted for, including such things as Social Security payments, pension plans, annuities and life insurance policies.