22 Mar SUCCESS STORY OF THE MONTH: TAP THE BRAKES ON PROBATE AND PUT IT IN REVERSE (MORTGAGE)
Mom dies at age 99 with three (3) surviving children. Mom has $50,000 in a bank account, $20,000 of debt and a home (which has homestead exemption) worth $150,000 that has no lien against it. One daughter, age 70, is unmarried (hereinafter referred to as “home child”) and lives in mom’s home and cannot afford to move. Although three (3) children want to sell mom’s homestead, they want to give the home child a year to find a new place to live. The children that are not living in the home would like to get their share of mom’s estate and are concerned that the longer the delay, the more likely that bad things could happen to the home child (such as death, disability or remarriage or if the home child gets sued) before the home is sold – not to mention an increase in property taxes (the over age 65 and homestead exemptions would be lost since mom died). The children have limited funds and would like to avoid probate (the process whereby the court determines if mom’s Last Will and Testament is good) and pay as little legal fees and court costs as possible.
OUR STEPS FOR SOLUTION TO MEET GOALS OF CLIENT:
Step No. 1: Prepare an Affidavit of Heirship after all bills are paid
Under Texas law (the Estates Code), since mom died without a surviving spouse, her children would be her closest heirs – which was consistent with her Last Will and Testament. If there are no debts owed by the decedent (mom), then title companies will generally accept an Affidavit of Heirship (although sometimes title companies have a waiting period to make sure there are no creditors and then probate would be required) if it is consistent with the Will and is signed by one of the beneficiaries (heirs) and two (2) disinterested witnesses. The Affidavit of Heirship (which explains the family history to show they are heirs and will have the legal description of the property in it) and a copy of the Will would then be recorded with the County Clerk to give notice to the world that the three (3) children own the property. One of mom’s children had access to mom’s account as a joint owner so that the debts could be paid prior to the Affidavit of Heirship being signed and filed. This left $30,000 of mom’s money.
The positive results of Step No. 1:
- Substantially less legal fees and court filing fees
- No necessity of child to go to court to prove up Will – so easier for the family
- No necessity of having to comply with the State’s Probate rules (i.e., notice to beneficiaries, notice to creditors, preparation of inventory, Executor going to court, etc.)
Step No. 2: Heirs deed property to home child
After the bills are paid and the Affidavit of Heirship is filed, the heirs deed the property to the home child. The home child would then immediately request exemptions for being over age 65 and it being her homestead.
The results of Step No. 2:
- Lower property taxes (over 65 and homestead exemption)
- The homestead is protected from claims of creditors
Step No. 3: Home child gets reverse mortgage in a lump sum
Since home child is over 62, she can get a reverse mortgage. So, if she borrows $100,000 against the home equity, then home child can pay $50,000 to each of her two (2) siblings, resulting in each child getting a value of $50,000.
The results of Step No. 3:
- If home child dies, gets remarried or becomes disabled, there is less of an issue since the other children have received their share of home portion of the estate without delay.
- Similarly, there is less of a rush to sell the home since each child has received an equal share of the home value.
Step No. 4: Keep cash assets (non-homestead) set aside
Although the three (3) heirs/beneficiaries have each received their share in the value of the home, the children care about each other and they realize home child has limited resources. If it takes a while to sell the property, there will be property taxes, insurance and maintenance expenses that home child might not be able to afford.
The results of Step No. 4:
- Open a rainy-day account until the home is sold to cover expenses in the event home child has inadequate resources. Although each child could be immediately funded with their share of the cash assets, the child that was named as Executor (hereinafter “executor child”) in the Will has the best credit history, etc.
- If the home increases in value until the date of sale, the children want to equally share in the appreciation. The rainy-day account will make it easy to equalize distributions if expenses such as taxes, insurance and maintenance are incurred.
- Keeping the funds in an account in the name of the executor child until the home sells gives the home child an incentive to make arrangements for her own housing and have the homestead sold.
Step No. 5: Keep cash assets in name of most credit-worthy child – but limit risk
The executor child is the most credit-worthy – but unforeseen events could happen to anyone. To reduce risk of Executor child becoming disabled, she will give a limited power of attorney to have access to the rainy-day account. Executor child will also make the account a paid-on death account to split equally among 1) executor child’s spouse or children, 2) home child, and 3) the remaining siblings.
The results of step no. 5:
- Limits (but does not eliminate) credit risk since executor child has a better credit history.
- If executor child dies, account will pass as it would in mom’s will
- There is still the risk that Executor child could be sued, but there are too little funds for estate planning protection for the remaining funds. Furthermore, liquidity is needed, so the purchase of assets that have creditor protection (i.e., annuity) become less viable.
- The beneficiary designation of the account in the name of executor child does not protect the beneficiaries from creditors, disability, etc., but again the amount of funds remaining do not warrant going to that extra expense.
Step No. 6: (Optional) – Family Agreement
The children could clarify what they want to happen and when in addition to the responsibilities of all, but this is an additional expense if they want a lawyer to draft.
The results of step no. 6:
- Although this step will not likely be taken, the family might want documentation to clarify their intent in the case bad things happen to any of them.
Clients achieved their main goals:
- Each child gets their share of the value of the homestead without delay of the probate process and without having to wait for the home to sell. Even if the will was probated, the children would receive equal value on the homestead property without having to wait for the property to be sold
- Less legal expenses and filing fees
- Keep property taxes low until home is sold
- Allow home child to stay in home until sold
- Give home child incentive to sell home sooner rather than later to have more equity remaining in the home and receive more of the non-homestead cash proceeds
- Keep funds available for expenses
- Limit risk of funds kept available for expenses
Although we have not used reverse mortgage previously in settling an estate, it is merely a tool in the toolbox and was central in achieving many of the goals of the client.