Join Michael as he delves into the intricacies of estate planning, focusing on the complexities surrounding mortgages and home ownership. In this episode, he shares a case study involving a reverse mortgage and discusses the nuances of asset transfers and probate. Whether you’re planning your estate or simply curious about the process, Michael offers invaluable insights that can help demystify this often confusing subject. Listeners will gain a clear understanding of how mortgages work in the context of estate planning and what happens to these financial commitments after a person passes away. Also, featured on the show are discussions
Welcome to Mobile Estate Planning with your host, Michael Bailey. Over a decade ago, attorney Michael Bailey turned his attention to estate law after he recognized the unacceptable number of adults without proper end of life planning. Michael recognizes that many of his clients have difficulty finding the time for making a proper estate plan. That’s why he became the Mobile Estate Planner. He will go to wherever you are to assist you with your estate planning, including writing wills, trusts, and giving you the information you need to avoid probate. Now, ATX, Ask the Experts, presents Mobile Estate Planning with your host, Michael Bailey.
Michael Bailey (Host) :
Good afternoon. Welcome to Mobile Estate Planning with Michael Bailey here on 560 KLZ AM, also heard on 100.7 FM or the KLZ 560 radio app. Phone number to talk to me on the air is… 303-477-5600. And again, that’s 303-477-5600. And my direct line, my phone number is 720-394-6887. And So here we are to try to do your estate planning so you can leave your family something besides just a loan. So we’ve got all sorts of All sorts of things to talk about. And I had someone, so my wife is a reverse mortgage loan officer. And she had somebody who called in and was talking to her. And apparently what had happened was their mother had passed away and left a house to her and her sister. And so her and her sister are trying to see if they can get a reverse mortgage on the house. so that one sister can buy the other one out, and then the sister that’s buying the other one out can stay in the… It’s one of those things that it just works. So she’s trying to figure it out. And so she asked me if I was busy. It happened to be right during the middle of another appointment, so I said, yes, I am busy. Why? Why? So she wrote me back and said she had an estate planning question. So I said, okay, well, let’s talk about this estate planning question. So apparently mom died about six months ago, and they haven’t left the house. And they said that the bank said, oh, we’ll just go ahead and keep paying on the mortgage, which is kind of unusual because usually when people die, people don’t want them to just – The banks were like, well, you know that if someone’s died, that means that ownership is going to transfer. That will trigger the due on sale clause. and due on transfer clause of most mortgages. So it’s somewhat unusual that a bank would just let somebody keep paying on a mortgage after the owner of the house died. And so, you know, for me, I’m kind of like, that leads me to believe that there might have been one or both of the daughters that had signed on the loan as a co-borrower. And so there’s somebody who’s still alive who’s paying on the mortgage because otherwise it would make much more sense for – that somebody would have – as to why they would not call the loan due or want it all paid off all at once because normally with loans – When somebody dies, the loan becomes due and it either needs to be refinanced or it needs to be the property needs to be sold so that the house can be paid off and or the loan can be paid off and paid off out of the proceeds from the sale of the house. So we’ve got so there’s different things that happen there. And so, you know, that was kind of my first thing was like, okay, well, that’s, you know, my wife says, well, that’s, that was weird. And I’m like, yeah, it is a little weird. But it’s also, you know, if it’s nice that, you know, the bank is letting them pay on the house and stay there. And so they’re like, Well, so this this lady was saying that she needed to, you know, she had talked to the loan people before. They said, Well, you know, you do need to go through if you want to try to get a reverse mortgage, you need to go through the probate process and transfer ownership of the house from individuals from from the from mom to the two sisters the two daughters and so um this lady was asking my wife she’s like well we have an appointment with the county to do a transition deed which i’ve never heard of so i’m not entirely sure i mean she probably there’s probably something that she’s thinking she’s doing i don’t know that transition deed is the correct legal term and i’d want clarification from that before I answered that question. But she wanted to know what, you know, and so she was asking my wife if she should cancel the meeting with the county because they were going to do a reverse mortgage. And I’m like, well, and so Marv’s like, well, you know, you probably want to go meet with the county and see what’s going on because you might need to probably need to file for probate if you have just a will. And I was like, well, you know, maybe they have a beneficiary’s deed. That’s possible. It’s possible, possible that they were. joint tenants. And so there’s something else that they can do there. It’s also possible that there is a will, then just the will needs to go through probate. And so, you know, there’s, there’s kind of a, quite a few unknowns here that you’d want to figure out with the ownership of the house before you can figure out what you’re going to do with a loan or a reverse mortgage. And so, you know, I was kind of talking through that with my wife. She’s like, well, you know, you didn’t tell me anything I didn’t know. I’m like, well, that’s good. I think apparently I have conversations with my wife about what I do for a living and she’s learned some things. But I also had that kind of more general conversation with my wife about ownership and mortgages. And when I meet with people… And we start talking about their assets and what you want to do with the assets and who would get the assets. People are always very, very quick to jump in and tell me all about how… all about what their mortgage is like. And I’m like, okay, that’s great. But the thing is that we’re talking about transferring your assets and who’s going to get them. But we need to talk about the mortgage. And I’m like, well, see, ownership and mortgages, although they are connected, they’re not the same thing. And they’re not always what’s most important. People are like, oh, well, you know, But if I have a mortgage when I die, then the bank’s going to come and take the house and it won’t matter anyway. I’m like, no, that’s not how it works. When I’m preparing trusts for people, I’ll ask them for a copy of the deed to the house. And they’ll say, well, we don’t have a deed to the house. The bank has it because we’re still paying our mortgage. And I’m like, OK. We’re going to just stop right there because that is something that probably I would say I would estimate 97, 98% of America does not understand is the way that a mortgage and a house and ownership works. So when you buy a house, you are the owner of the house. And then the bank will put a lien, which is a way to make sure that they get paid, against your house for the value of the mortgage. So you own the house. As part of what you do when you buy the house is… There will be a deed that transfers ownership from the previous owner to you as the current owner. So you own the house and you have a copy of that deed. You have it. The title company may report, record it for you, but there will be a copy of it in your closing papers. You own the house, not the bank, not somebody else, but you own the house. Now, if you go to transfer the house, the bank wants to be paid back. Whatever is left of the value of their, um, of their loan you know so they they don’t want you to transfer the house and not get paid so that’s why they have the lien and they’ll file what’s called a deed of trust against the house so that when you when um you go to sell the house title companies will do a title search they’ll look and they’ll say oh hey well hey we we see that you have this house that you own, but there is a deed of trust against it for about half the value of the house. So when you sell the house, half the value is going to go to that bank and half the value will go to you. So you can then use it to put it into whatever, whether you buy a new house or whatever you want to do with it. There’s different options available. You just actually have to do it that way. And so sometimes, and so, and we talk about that and people are like, oh, I don’t understand that. I’m like, that’s because you’re thinking of the house, not as a house. So you are listening to Mobile Estate Planning with Michael Bailey here on KLZ 560 AM, also heard on 100.7 FM or the KLZ 560 radio app. Phone number to talk to me on the air is 303-477-5600. And again, that’s 303-477-5600. And my direct line is 720-394-6887. And one more time, 720-394-6887. So people are thinking, they’re like, oh, I didn’t know that’s how it worked for a house. And I say, yes, that’s because you’re thinking of it like it’s a car. Because when you buy a car and you have a loan on a car, then the company that is, that has the loan on the car, they hold onto the title. So we bought a car years ago and, you know, we, had a loan and so we were paying on the loan and once the loan was paid off then the company that had the loan they sent us the title so we could go and we could We then had that title so we could show that we owned the car and we could pass it on and sell it to somebody else. Because if you have a car that has a loan on it and you go to sell it, then the company that had the loan wants to be paid back. That’s why it’s always a good thing to buy a car for less than the full value because cars lose value when you drive them off the lot, especially if they’re brand new. And then you’re like, oh, well, you know, if we try to sell this car and it’s worth less than what we paid for it, then we have to make up the difference. And, you know, the loan company wants to be paid back from the sale of the car. They also want to be paid back the difference. But the loan company holds on to the title until such time as you’re done paying. And then they send you the title to the car. Well, with a house, it’s the opposite, where you get title, and then if you don’t pay on it, then they will come and try to take it. That’s the whole foreclosure process. The foreclosure process is the bank saying, oh, you owe way too much money. You haven’t been paying us on this house. So now we have to foreclose on the property, which means basically we’re going to collect that debt against the property. So because you haven’t been paying, and because you haven’t been doing what you’re supposed to do, we now think you’re a bad bet to hold on to this house. We thought you were an okay bet when you bought the house. That’s why we loaned you the money. But now you’ve proved to us that you can’t pay this loan. So we think you’re a bad bet. So we’re going to come in and we’re going to say, hey, this is a bad bet. This debt’s not going to get paid. Or these were not being paid under the terms of when we’re supposed to. So We would like to, we want to foreclose on the house and we want to force the house to be sold so that we can get paid back on our debt since you’re not doing your job of paying on the loan and paying on the mortgage. And so that’s the foreclosure process. That’s why a bank can’t just come in and say, you know what? You are in our house. We own it. You have not paid. So get out. Kind of like you’re a renter in your own house. Renters, there’s other laws that prevent renters from just being kicked out. But if you don’t pay your rent… then they will start eviction proceedings to have you removed from the house. So, you know, there’s all sorts of different things that go on here. And there’s all sorts of different things that are involved. And so because of that, you can’t just you’re not just like, oh, hey, well, you know, we’ll get rid of. Yeah. So because you’re in your house, you’re protected of being in your own house. And as long as you’re paying on the mortgage, then you can stay in your own house. But you do own your own house. That’s part of why you’re responsible for the property taxes. You may not always pay the property taxes in person because part of what you pay to the mortgage company or for a lot of mortgages is the payment interest taxes and insurance. So you don’t necessarily pay out of pocket each year for your homeowner’s insurance. That’s part of what the loan company, the mortgage company collects, and they put it in an escrow account. And then that escrow account will pay out to pay the property taxes or to pay for the homeowner’s insurance. Yeah. That’s built into the cost of the mortgage. And so part of the reason that the mortgage company wants you to pay those payments is because if you’re not paying those payments and then the property taxes come due, well, they want to protect their interest in the loan, so they will pay those property taxes. And they’re like, well, wait a minute. If we’re laying out $5,000 for the property taxes and you’re not paying us, How exactly is this a good deal for us? You get to live in the house. We’re paying the property taxes so that the government doesn’t sell your house out from underneath you or just come and take it from you. So we’re supposed to get paid at least that $5,000, even if it’s not everything else. We need to get paid at least that or another $4,000. We’re going to pay for your homeowner’s insurance. So that’s another $3,000. Well, now we’re out $8,000. And you’re supposed to be paying us $2,000 a month. So we’re supposed to be getting $24,000 a year. And of that $24,000, we’d pay $8,200. the property tax and for the homeowners insurance, but then we’re also paying towards the loan. Okay, yeah, we can do that. So not only do we not have our $24,000, but we had to put out $8,000 of our own money because we don’t want our, you know, if the house burns down, we want to get paid back by the insurance company. Or if you don’t pay the property tax, then the government will sell your house to pay off the unpaid property taxes. So not only did we not get the $24,000 we expected, but now we have to put out $8,000 more. So basically you did not pay us 24,000. So we’re already 24,000 behind. Now we’re another 8,000. So now we’re $32,000 that we were expecting to have here that we’ve had to come up with for you. And oddly enough, the loan companies aren’t super keen on, uh, floating people at $24,000 to $32,000 a year when people don’t pay. I mean, even Luke can tell you that that doesn’t seem like a great thing, that most companies want to be like, oh, sure, we’ll give you a loan and then just don’t pay us. We’ll come up with $8,000 a year to make sure that you’re okay. And yeah, don’t worry about paying us the $24,000 that we need. I’m sure that you’ll make it up to us when you’re good for it. Well, no, loan companies aren’t super keen on that. They tend to want to be paid. And so they’re going to protect their interest. And the thing is that if the property tax is unpaid and the government goes to sell the house, government’s not going to try to get top dollar for the house. They’re just going to get, I mean, if you’ve got a, say you’ve got a $300,000 house and there’s $50,000 of property tax. Well, really, the government only wants their $50,000. So if the $300,000 house sells for $75,000 and that’s the most they can get at an auction, they’re like, cool, we get paid back. Awesome. So then there’s $75,000. They take their $50,000. There’s $25,000 left. If the loan company comes and says, hey, wait a minute, we need our $25,000. They’re like, good, cool, here you go. But wait a minute, they owed $250,000 on the house. Where’s our other $225,000? You’re like, well, you’ve got to go talk to the homeowner. Well, the homeowner is no longer the homeowner because the house was sold. And now you’re sitting there going, well, you know, but the government sold it for 75. And then the bank is the mortgage company is going to the individuals and saying, well, you owe us $225,000. Well, you know, but they took our house. We can’t live there. I’m like, uh-huh. And if you told us about it, we would have sold the house and we would have tried to get close to the $300 it was worth so that we could get paid back. So the mortgage company does not want the house sold immediately. in such a manner that they would not get paid back. So they have a very vested interest in making sure that the house gets sold in such a manner that they get paid back. They don’t want it to be sold at a government auction for less than it’s worth. They don’t want somebody to sell it or transfer it out to somebody else for less than it’s worth because the mortgage company wants to be paid back. And they… And that’s true while you’re alive. It’s also true when you pass away. So when a person passes away, the mortgage doesn’t just disappear. That would be great if it did. You’re like, ooh, okay. So what I’m going to do is I’m going to buy a house and then I’m going to transfer it to my employer. 95-year-old grandpa, and he’s going to get a loan on it. And, you know, grandpa has, you know, 25 grandkids. So he’s like, okay, well, then grandpa can have 25 different houses he owns with 25 different mortgages. And then when grandpa dies, all those mortgages will end and each of the grandchildren will now have their own house without any mortgage. It just kind of disappears. It’s clean. It’s great. That would be awesome. awesome for us as consumers. That would be atrocious and horrible for the mortgage companies. So most mortgage companies try not to do things that are horrible and atrocious for them. You know, it’s just one of those things. A mortgage company exists to make money, not to transfer property to kids who figured out or grandkids who figured out how to get grandpa to own their property. So you are listening to Mobile Estate Planning with Michael Bailey here on 560 KLZ AM, also heard on 100.7 FM. Phone number to talk to me on the air is 303-477-5600. And again, that’s 303-477-5600. And my direct line is 720-394-6887. And once again, that’s 720-394-6887. So because of the way that things work and the way that you want things to have things happen, you don’t always have… The option of when you’re trying to set up an estate plan, you have to account for, okay, so yes, what are we going to do with the assets? Okay, cool. So how much are those assets actually worth? Do we need to pay off a loan? Yes. Okay, so we’ve got to talk about it, but it’s not the most pressing thing. Simply because you have a mortgage doesn’t mean you can’t do estate planning or you can’t put a house in a trust or something like that. We have to pay attention to what’s going on. There are certain type of trusts where if you put it in there, then it might trigger a due on sale clause, but that’s like irrevocable asset protection trust where you’re giving up your ownership interest in the house. And really, we only do that, or at least I mostly only do that for my elderly clients who are trying to protect money from Medicaid and long-term care costs. So we address that. We look at that. We go, okay, well, there might be some things that are going on here and some things that we need to deal with. And you can’t always just ignore mortgages. You can’t always just ignore ownership and ownership transfer interests and things like that. So there are certainly things that we need to look at and need to deal with. But for the most part, when somebody dies, that’s going to trigger a due on transfer, due on sale type of clause. And that means when somebody dies, if there is a mortgage, the house will likely need to be sold to pay off the balance due on the mortgage. So, you know, in the case of my wife with reverse mortgages, I’ve talked with people and they’re like, oh, well, if you have a reverse mortgage and it’s still there and you die, then the bank just takes everything and nothing goes to your kids. I’m like, nah, the bank will take the value off. Of the reverse mortgage, but then the rest goes to the kids. So, you know, used to be that reverse mortgages were such that you had your first mortgage would pay out all of the lump sum. And then when you died, bank would take the entire house because they’d already paid out all the money on it. Well, many reverse mortgages now, you’ll do a reverse mortgage, you get like a line of credit. So you’re like, okay, I’ve got an $800,000 house. You get a $500,000 line of credit. Of that, you’ve spent $100,000 during your lifetime. Then you die, your kids go, they sell the house, the reverse mortgage company takes their $100,000 they have left, and then that other $700,000 goes to the kids or the heirs or whoever it is. Because reverse mortgages, years ago, decades ago, they would pay out the full amount of the value of the house, and then they could collect everything at the end. Well, that’s not how reverse mortgages are set up now that got got in trouble. There is problems there, especially if you are you lend things when housing prices were high and then housing process prices fall and people would leave and then they couldn’t recoup their money. And so again, the mortgage companies were like, well, hey, if this is going to be a product where we’re going to make money, because that’s what mortgage companies try to do is make money. They, they’re like, well, we’re not going to lend the full 100% of the value of the house, we’re going to say the maximum we can lend is 60%, or 70%, or 80%, depending on the age of the person. And we’re not going to just give one big lump sum of money and say, Hey, here you go. Here’s your $700,000. Good luck. Have fun. Don’t spend it all in one place. And then they’d go spend it all in one place. I mean, not that they would sometimes spending it all in one place was necessary. You know, if you have medical expenses and you’re, you know, you say, don’t spend it all in one place, but you’re in a memory care facility at $20,000 a month. And $240,000, you’re like, hey, well, after two years, I’ve spent all my $500,000. I didn’t spend it all at one time, but I spent it all in one place on the memory care facility. Oh, wow. Well, and if you have that type of money to spend that you can use to spend to pay for your care, by all means, go for it. But you’re a little bit careful. The rules have become a little bit more careful. And partially, it’s to protect consumers so that they don’t overspend and spend all their money and then end up with nothing. And then it’s upside down. But also, partially, it’s to protect the mortgage companies who want to make money. And so the rules are there. Do they benefit? Not every rule that’s ever been set up is set up to benefit the consumer. Not every rule that’s ever been set up is there to benefit the mortgage company, despite what some of the rhetoric may be that all the laws are to protect the giant corporations. I’m like. Now, both of the objectives are trying to be fulfilled there, protecting the consumers and protecting the mortgage company. Because you don’t want mortgage companies to go out of business and disappear, and that creates chaos too. So when somebody dies, you’re like, okay, we need to pay the mortgage off. All right, cool. We’ll talk to the mortgage company. They don’t want payoff right away. They’re not like, oh, well, they died last Thursday. Well, you should have the house sold by Tuesday. What’s going on with you? There’s five days. What’s going on? Real estate transactions don’t take less than five days usually. There’s time involved. There’s money exchange involved. There’s all those type of things. And you have to go and verify who the owner is and how much is owed and who it’s owed to and all those type of things. Things take time. It’s not quite as simple as, oh, hey, I’m going to go to the store and I would like to buy an apple. Oh, there’s an apple. I will just buy it. That would be great. Except for how did the apple get there? How did the apple, you know, someone grew the apple and then the apple was harvested and then it was transported and then it was put on a store shelf and it can only be on a store shelf for so long before it rots. So you have to have the proper… Number of apples and all of these things that go into an apple being on a store shelf, we don’t think about at all because it’s all done behind the scenes. Real estate isn’t necessarily all done behind the scenes. And when someone dies, neither is estate planning and estate administration. So we plan ahead for that. We have to pay attention to what is going to go on with real estate and when things need to be sold to make sure everybody gets paid, everybody gets taken care of, and so that the kids aren’t stuck with their parents’ debt or with their houses that they don’t want. So thanks so much for listening to Mobile Estate Planning with Michael Bailey. I’ll be back probably in a couple weeks, and we’ll talk to you then. Thanks and bye.
Announcer (Host) :
Mobile estate planning with Michael Bailey will return to ATX next Wednesday at 2.30 here on KLZ 560, AM 560, FM 100.7, and online at klzradio.com.
