Ways to secure the family homestead. Need ideas/advice

[Urchina]

I need some ideas regarding my MIL's house. She has come on hard times lately and cannot afford to keep making the payments on it. DH and his siblings have come into their inheritance from his dad (FIL and MIL divorced some time ago) and would like to pool their inheritances to pay off part of the mortgage. The goals are three-fold:

1. Keep MIL in the house as long as she's able to live independently.
2. Protect the house from possible creditors / bankruptcy of any one family member (MIL or kids)
3. Provide some structure to the transaction so that, if and when the house is sold later, the kids can recoup some of their investment in it.

None of us has ever done any of this before, and nobody in our families have, either. Our current working idea (which we're researching, hence this forum post) is to form some sort of family trust, with DH as trustee (he is an excellent choice). MIL would transfer title of the house to the trust, which would be held by the kids but NOT MIL, the kids would kick money into the trust, and the trust would pay off as much debt as possible. Additional influxes of cash over time would be reflected in the percentage each kid had in the trust. The trust would give MIL the sole and exclusive use of the house until her death (which is, hopefully far, far away) and MIL would be expected to maintain the house in at least its current condition, as well as make remaining mortgage and tax payments.

Then, when MIL passes, the kids can decide what they want to do -- if one kid wants to buy the others out, if the trust wants to rent the property, etc.

Anyone heard of anything like this, and are there other legal structures we should consider? One concern is that if a single kid ran into money trouble and declared personal bankruptcy or is sued in a liability lawsuit, we wouldn't want the trust exposed to that liability. How can we shield against this? Also, what happens if MIL stops making mortgage or tax payments? How would this affect the trust?

Thanks for any ideas or other places to look. We'll be talking to an attorney about this in the next couple of weeks, as well as to a mortgage broker, but I thought I'd cast our net wide for ideas first, before we start shelling out $350/hr to get "educated" by our attorney.

 

[bizlady]

You may want to consult with an attorney specializing in elder care. If you MIL does not have financial resources, and may need financial assistance (medicaid) in the near future, there is often a look back period of up to 5 years (may vary by state). So, if you were to pay it off, even put it in your own names or a trust, you still may be liable for her equity. Not sure if a trust would protect that or not.

 

[Martha]

How about just getting a junior mortgage? You can have mortgages that contemplate not all the money being advanced at once.

You might want to talk to a lawyer about the options.

 

[Urchina]

bizlady, thanks. This is something we're considering. MIL is currently quite healthy and still relatively young; our hope is that by acting now we'll be out of the five-year period when and if she does need medicaid. But I'll put it on the list of things to consider so that we can have all our bases covered.

 

[Westernskies]

Buy the house as a family trust and rent it back. Structure her rent to cover the smaller mortgage payment the cash infusion will give you.

 

[Urchina]

Westernskies, Martha --

Buying the house as a family trust and renting it back sounds very much like something we'd like to do, but we'd need to take a mortgage out as a trust, right? (Meaning, the trust would be the mortgage holder)... how does this work?

Martha --

There's already two loans on the house, a main mortgage and a maxed-out HELOC. We could, with our cash infusion, get rid of the HELOC, leaving just the main mortgage. I guess I'm not sure how a junior mortgage would help here, or how it would be structured. What would be the point? (And would it protect the kids' investment in the house if MIL declares personal bankruptcy (something that is not entirely out of the realm of possibility)?

And yes, we're definitely talking to an attorney about this, but I'm trying to educate my self first. Thanks for your ideas and thoughts!

 

[Martha]

The mortgage does protect you in event of bankruptcy by mom. Your mother would have the option of reaffirming the debt or walking away from the home. If she walked away the first mortgage holder might foreclose but you as second mortgage holder would have the right to pay off the first and foreclose your own mortgage, Or even take a deed in lieu of foreclosure.

If you simply loaned money to mom without collateral it would be an unsecured debt which would be wiped out in a bankruptcy.

There are issues with a mortgage to consider, as it assumes a debt that will be repaid and in your case it looks like the plan is no repayment until the house is sold or she dies, which complicates things.

If you do a trust is there property tax consequences in your state? Some states have lower property taxes for homesteads and you would need to find out if a transfer to a trust creates a problem with the homestead.

If you do a trust you have to be sure that the trust pays fair value for the property. Otherwise, if she files bankruptcy or has the need for public assistance the transfer could be undone as a fraudulent transfer or under medicaid look back rules.

Also, any interest she retains in the trust/home would become part of any bankruptcy estate. Her right to live in the home for life may be an asset that a bankruptcy trustee perceives has value and he may try to recover something for that value. But if it was not in the trust but titled in her name in most states fairly significant equity is protected from creditors. Putting it in a trust may lose that bankruptcy homestead protection.

Transferring into a trust might be a default under the terms of her mortgage. (Something to at least be aware of.) But then again, so might be granting a junior mortgage.

Anyway, there are a lot of issues to design around and I only touch on some. I didn't even touch on issues regarding debts of the children or divorce of the children.

See the signature.

 

[Urchina]

Martha,

Thanks for the additional detail and giving us things to think about / talk about. Signature is noted, and your time and thoughts are very much appreciated!

 

[bizlady]

Keep in mind too that if you "rent" the home back to her, you have to charge or declare market rates.

 

[ChrisC]

I need some ideas regarding my MIL's house. She has come on hard times lately and cannot afford to keep making the payments on it. DH and his siblings have come into their inheritance from his dad (FIL and MIL divorced some time ago) and would like to pool their inheritances to pay off part of the mortgage. The goals are three-fold:

1. Keep MIL in the house as long as she's able to live independently.
2. Protect the house from possible creditors / bankruptcy of any one family member (MIL or kids)
3. Provide some structure to the transaction so that, if and when the house is sold later, the kids can recoup some of their investment in it.

Anyone heard of anything like this, and are there other legal structures we should consider? One concern is that if a single kid ran into money trouble and declared personal bankruptcy or is sued in a liability lawsuit, we wouldn't want the trust exposed to that liability. How can we shield against this? Also, what happens if MIL stops making mortgage or tax payments? How would this affect the trust?

Thanks for any ideas or other places to look. We'll be talking to an attorney about this in the next couple of weeks, as well as to a mortgage broker, but I thought I'd cast our net wide for ideas first, before we start shelling out $350/hr to get "educated" by our attorney.

Check with a good elder care lawyer who also does some estate planning. If your family members can take out the mortgage-lien holders by paying them off, this would immensely improve your family's flexibility and perhaps even your Medicaid protection strategy for preserving the house. If the mortgage lienholders are taken out of the picture, MIL could deed over the house to an LLC, retaining a life estate in the house. The LLC, which is not difficult or expensive to form in many States, except in NY where there are obscene publication requirements, could be controlled and operated by famility members and the capital/equity structure of the LLC and membership could approximate family member financial contributions and other efforts to the situation. The LLC might be a better vehicle from a liability limiting standpoint than an irrevocable living trust. It might also be more manageable from a family planning standpoint, as well. (You might also be able to have the LLC issue debt to the family members that financed taking out the mortage holders, but I think this might be too complicatiing.)

The life estate for MIL provides a basis for MIL to pay annual taxes, insurance and other maintenance costs associated with the property, which she should bear, and if overbearing to her, the LLC and members could step in to help MIL with these on-going charges and expenses. The life estate also has some tax benefits, as the tax basis in the property might be stepped up when MIL passes. And if you get beyond the five year look back period, you might be better off from a resource eligility and recovery standpoint under Medicaid than an irrevocable living trust placed on the property.

 

[Gumby]

Further to ChrisC's post and to address your concern about creditors of the children -- if you had an LLC and put the house in it, creditors of the children potentially would be able to attach that child's interest in the LLC, but not the underlying property or the interest of any of the siblings. The operating agreement for the LLC can be constructed so as to limit the ability of an attaching creditor to force a dissolution.

But, in the end, you really do need to speak to a properly qualified lawyer in your own state about all this.