Beware the Oft Spoken Line to Seniors: “Transfer Ownership of Your House to Your Kids!”

Should parents transfer their home into their adult children’s names, deeding the house to their kids? This is one of the most common questions that comes up when discussing estate planning with families.

In fact, oftentimes families assume that this preferred and correct handling based on the “advice” you or your adult kids have received from well-meaning friends and family—even the internet. The intention of a transfer is always the same. You and your family want to preserve your family home from a required spend down of your assets should you need extensive medical care in a nursing home or acute care facility.

The fact is, no two families are alike. Don’t sign a deed transferring your house to your kids without taking these important first steps: Have conversations about appropriately protecting your assets with your family and then post haste make an appointment with your estate attorney. Recognizing the potential risks of arbitrarily transferring ownership of your home to your kids will give you a clearer picture of why a willy-nilly transfer is a really bad idea.

Timing is Everything

It may be too late to consider a transfer if a diagnosis of an illness or condition has just been made. Medicaid looks back five years for major financial transactions. If the goal is to reduce your assets so you can qualify for Medicaid, remember that Medicaid will review financial transactions over the last five years. The transfer of a home within this 5-year window constitutes a red flag and may disqualify you from Medicaid nursing home coverage unless there are sufficient other assets to cover the costs during the 5-year period.

Emotional Decision-Making Won’t Do

Having your adult children help you with your financial needs late in life can be challenging. Your emotions do not always help you make the best decisions. A desire to keep the long-time family home in the family or, perhaps less charitably a sense of entitlement on the part of some or all of your children who believe that it should be the family legacy, do not typically lead to sound actions. There are many laws and rules to navigate, and time may not be on your side. Plus, the decision cannot be one-sided. If you are capable of sound decision-making, your wishes combined with the guidance of your estate attorney, financial advisor, or CPA must agree on the best course of action for you and your family.  Allowing your kids to be privy to these conversations and have a voice is also a good strategy for family harmony.

Uncle Sam Comes Calling

Transferring your principal residence to a family member may disqualify you from part or all of the capital gains tax exclusion on the sale of the residence and cause unnecessary income tax liability when the residence is sold in the future. Consider the hefty tax bill for either a parent or their children from a capital gains tax on any gain (e.g., profit) on the house sale if you lose the exclusion and your family decides to sell the house during your lifetime.

Is a Life Estate Deed the Answer?

Individuals often think they achieve the best of all worlds if they establish a transfer of real property through a life estate deed. A life estate deed permits a property owner to have full use and occupancy of their property until their death, at which time your home will be transferred to your children. Because life happens, there are any number of potential pitfalls:

Appropriate Transfer of Home. Get Guidance First.

Indeed, there are situations in which a transfer will work. For example, Medicaid sometimes recognizes a caregiver child exception that allows you to transfer ownership of your house, provided the adult child has lived in your home for at least two years and provided a level of care that prevented you from required nursing home care. That said, the transfer of the home through a life estate deed would cancel the caregiver exception.

A Trust is another—if not the best way—to transfer home ownership from you to your children. When the house is transferred to the Trust, you establish directions for the administration of the Trust and appoint a Trustee who is required to protect your interests.

Still in either of these situations, the counsel of your estate attorney in collaboration with your financial advisor, and CPA are the professionals best equipped to assist you with these specific situations.

At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we are available to answer your questions, inform you of your options, and guide you in both your decision-making and the transfer implementation if all parties determine that a transfer is in your best interests.

Call us at 908- 232-2244 and enjoy the peace of mind of knowing that you are backed by support and knowledge in making informed decisions.

When There’s More Than 1 Sibling, What Happens to the Inherited Family Home?

My estate shall be divided equally among my 3 children. That’s probably the most common final directive in a last Will and Testament. But what happens when most, if not all, of an estate’s assets are real property. Think: the family home.  The most common property siblings jointly inherit is a house. How do you divide that very tangible asset among 3 people?

In a best-case scenario, the siblings would agree unanimously on a fair and equitable settlement: Sell the home and split the proceeds equally. Distribute other assets so one heir retains the property or negotiates buyouts for those wanting cash.

Flaws of Nature

But human nature isn’t always so rational…or even kind…especially when there’s a decent amount of money at stake. What happens when siblings are counting on an inheritance, or their financial needs are different? What if one sibling has devoted her life to caring for their parents? What happens if there’s already acrimony among the siblings in the first place?

Unfortunately, as is often the case, specific instructions regarding the disposal of the property are not provided in the decedent’s estate planning documents. Consider these situations which pour fuel on the fire: One sibling has lived in the home taking care of the parent and wants to stay but can’t qualify for a mortgage to buy the others out. Or the caregiver may have a financial windfall from the deceased outside of the will—perhaps in jointly held property, bank certificates, or as the life insurance beneficiary. This may seem fair, and probably is, but that added benefit bestowed upon the caregiver adult child causes dissension among siblings, who then resent having to give the caregiving sibling an equal portion of the estate. And sometimes a sibling with greater wealth will have an unfair advantage to acquire the home.

Those Essential Family Conversations

There’s no better example of the need for important family conversations when parents are still healthy and fully in command of their cognitive capabilities—no better example for the requirement for estate plans with Wills or trusts in which everything is stipulated in black and white.

Even more important is this admonition: “Parents should never divide an indivisible asset in hopes that it will bring their heirs together,” says Lee Hausner, a Los Angeles-based psychologist and author of Children of Paradise: Successful Parenting for Prosperous Families, an instructional book about handling family assets. She’s seen contentious situations—even fights between siblings that turn physical.

Ideally, in these situations, the siblings must amiably turn to a Plan B. Here are the most common options for splitting an inherited home with siblings when the estate planning documents do not provide for this contingency:

Sometimes There’s No Sibling Resolution

Still, sometimes none or some of the siblings are not ready to compromise. The real nail in the coffin is when one of the siblings thinks they’re getting the short end of the stick—or their own spouse who is not a bloodline family member starts sharing poisonous ideas—and this sibling begins to make waves.

If all else fails and an agreement cannot be reached, the siblings may have to involve the court in order to force the sale of the property and terminate their co-ownership. In this case, heirs who want to sell the home file suit to force its sale against the wishes of those who want to keep it. An impasse like this is called a partition action and can be devastating to a family.

Some Prudent Counsel

There’s no denying the fact that estate planning in which parents and adult children speak openly about their plans, finances, and other important issues that could become factors is essential. Rules of thumb surrounding these talks include:

At Phelan, Frantz, Ohlig & Wegbreit, we can help you facilitate these important conversations and provide you with the thoughtful guidance on sensitive issues. This will help your heirs avoid acrimonious situations when you are gone.

Call us at 908.232.2344 to get your estate planning underway or to review it. Planning today will ensure a brighter future for your loved ones tomorrow.

 

 

What to Do With Your Cherished Home When You Die: It’s Not as Easy as You Think

The reality is that leaving your house to your kids when you die is not always what your heirs want you to do with it. Trust us. All you have to do is ask your kids.

If you’re like most clients, you come to our firm to talk estate planning, and your focus is typically your Will or Trust, your retirement plan beneficiaries, and the tax strategies that will allow your kids to get the most out of their inheritance. All too often a discussion about what will happen to your house—even your vacation house at the Jersey shore—gets left by the wayside. There’s a good chance your emotions run deep and that you have an intense attachment to your family home. Your assumption, therefore, is that your kids have the same connection to the house that you do.

Please think again. The two operative words here are emotions and assumption. Your home surely holds wonderful, rich memories. It is likely also your single largest holding and in today’s housing market, that may very well constitute a good amount of money and a substantial investment. Word to the wise. Emotion doesn’t work with decisions that are innately investments.

As for your assumptions…you’re first assumption is that everyone gets along. But if your kids argue now about who ate the frosted flakes, how are they going to get along when the stakes are higher? Suddenly they’ll be faced with decisions about upkeep and maintenance or renting the shore house. Decisions like that can fracture families.

As importantly, your assumptions don’t take into account the natural progression of family events. You’ve cut the apron strings and enabled your kids to chart their own course and flourish. A house may be an encumbrance that undercuts your children’s vision of their future. Keeping the family home, then, may end up being a curse rather than a blessing.

Examine your feelings

There’s no question that the emotional attachment you have to your house is understandable. You’ve created memories there. Your vision is to make it part of your legacy. You want your kids to have the opportunity to live there…to have their kids go to their school. Or, if it’s your shore house, you want them to enjoy memorable summer days together and then pass the house on to your grands, so that it will stay in the family forever.

As warming as that idea is, it has the potential of becoming an at all costs proposition: It doesn’t really account for life changes that your children or grandchildren may have one day. What if work takes them all over the country even around the globe? Plus, as they create their own families, the circle widens. It can even and likely will include in-laws. Before you know it, you have 15 people who can’t get along managing a house together. There are added risks such as divorce or, even worse, death. In in lieu of family harmony you may end up with in-fighting and discord.

It’s important to understand that emotion and assumption can take you down a rocky road when you’re making decisions today that will impact your children long-term. Even though it may be difficult, try to step out of the emotion and think more pragmatically. Discuss the idea of leaving a house to your kids with your estate planning attorney. She can illustrate some worst-case scenarios that, guaranteed, are far different than the vision of the ongoing family unity you see in your mind’s eye. You may not want to hear what your attorney has to say, but the dose of reality can help you give up emotion for more pragmatic thinking.

Have those important family conversations

Estate planning isn’t, after all, one sided. This is especially true when leaving a house to your kids and all the responsibility that comes with it. Just as you discuss financial matters such as who in the family will be your Power of Attorney or Healthcare Proxy, have a frank discussion about whether they can envision themselves living or vacationing in that house. Make them understand that you want and need them to be forthright. Steel yourself against potential disappointment and be willing to let go of the motivation to have them inherit the house. Without some outside-the-box thinking on your part, it could end up as an inheritance at any and all costs. Their honesty now about the vision they have for their lives going forward may initially sting, but it’s a good preventive for problems in the future.

Create happiness. Prevent messes

Sometimes we are unable to convince clients that leaving a house to their kids may not be prudent. In these instances, creating a Will or Trust that provides a degree of flexibility for a potential sale or buyout is a viable second option. On the one hand, the parent’s hopes and intentions are honored. On the other, their kids, grandkids, even nieces or nephews who may be beneficiaries can take comfort in knowing they have an out—have the ability to make decisions that will work for them—if sharing the family home or even managing it alone does not come together smoothly.

Flexible documents include language that delineates how to get somebody out of the property if the situation doesn’t work and how to unwind the inheritance by selling the property. The language of these documents:

A dollar versus fair market value

So, is the buyout for a dollar or is it to real market value? That’s a question that can and does come up. The answer to that question is unequivocally always fair market value. Anything different or less, and it’s a gift that could subsequently interfere with their estate planning and how they distribute their assets to their loved ones. It comes down to the fact is that if they have an ownership interest in the house anything drastically short of fair market value is gifting. That’s a massive issue, especially right now with the proposals in Congress that could significantly bring about estate tax reform.

One last salve

There are plenty of situations in which the moment the Will is read, one of the kids says they clearly have no interest in the property. In this situation, as long as all the beneficiaries agree, the law will allow for there to be a distribution in lieu of the house. This means that the sibling who doesn’t want the property gets other assets from the estate and the other two siblings get the house. In other words, a clause can be written into the document that gives flexibility to the final distribution. And again, that distribution must be made in alignment with fair market value of the property at the time of distribution.

Rational decisions are key at any juncture 

The image of your children having a “What was my dad thinking?!” reaction to your Will is far from pleasant. Being well-thought out from the get-go is one way to avoid it.

Discuss these matters with your family and your estate attorney as you develop your estate plan. Make certain reason trumps pure emotion. Work with your estate attorney to include flexible language. These actions are among the ways to steer clear of the mess of family discord.

At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we know how much your loved ones matter to you. They matter to us, too.

Call us at 908-232-2244 and cover all the bases to ensure your legacy will bond your family, not divide it.

USING A REVOCABLE TRUST TO PASS ON REAL ESTATE TO YOUR CHILDREN

Act Now to Prevent the Future Hassles of Out-of-State Probate

The concern is a common one: “I want to make it simple for my kids,” say aging parents of adult children. “I don’t want them to experience stress when the time comes to settle my estate.”

Estate attorneys have solutions to honor these wishes. These solutions are, in fact, quite simple to execute, provided they’re completed as part of your estate planning. Failing to attend to these matters during your lifetime may mean you are bequeathing not only an inheritance to your children, but also a probate nightmare, particularly if you own property in more than one state.

Jumping Through the Hoops of Probate in Several States

Many of our clients have a primary residence in New Jersey and own vacation homes or rental properties in other states such as Pennsylvania, Florida, or New York. If the goal is to pass these properties on to future generations in the simplest way possible, the focus should be on ways to avoid probate in more than one state.

States are possessive of real property located within their borders. Accordingly, the appointment of an executor in New Jersey is of little consequence outside of New Jersey. When it comes to the transfer of real property inside their state, individual states reserve the right to make their own determination as to who should be appointed pursuant to their state’s unique rules. And while New Jersey has a relatively straightforward probate process, other states do not. Going through probate in states like Florida and New York, for example, takes considerable time and money. Thus, effective estate planning that for individuals who own multiple properties often requires the implementation of a plan that helps families avoid having to institute probate actions in multiple states.

Transferring Property Into a Revocable Trust: Smart Estate Planning and Flexibility

There are various estate planning tools that can provide you with peace of mind knowing that your assets will be transferred seamlessly to your heirs. One such tool, a revocable trust, also known as a living trust, has multiple features that can benefit you during your lifetime and your heirs when it comes time to settle your estate. A revocable trust provides a prearranged mechanism that will ensure the continued management and preservation of your assets, should you become disabled. It can also set forth all of the dispositive provisions of your estate plan and detail how you want your assets to be disbursed. In addition, a trust protects your privacy and the privacy of your beneficiaries because unlike a Last Will and Testament, which is a publicly available document once probated, a trust is available only to the impacted beneficiaries.

Finally, transferring your various properties into a revocable trust will help your family avoid the nightmare of multiple probate actions and the corresponding costs of different lawyers in different states. Because you are the trustee of your living trust, you still have full authority with respect to how the property is used and managed during your lifetime and all income tax consequences are reported on your personal income tax return.

The creators or “grantors” of the trust, which can be either a single individual or a couple, can establish the terms that will dictate what happens to assets held in trust upon their death. To this end, successor trustees also are named by the trust, which ensures that the grantors’ designated agents have automatic authority to sell, transfer, and manage the property upon the grantors’ death without the need to seek court appointment. In short, when properties are owned or held by the trust, there is no need to probate a Will, whether the property is held in New Jersey or another state.

Further, revocable trusts offer a degree of flexibility. For instance, if you become incapacitated or ill during your lifetime, the successor trustee can step up to assist and run things, offering a seamless transition. In addition, other assets, such as bank or brokerage accounts, can be retitled into the trust. Many financial institutions prefer to manage assets held in this manner as it allows them to respond quicker in emergent situations and serve clients more nimbly than they would be able to if they had to wait for the production of a power of attorney or a court appointed guardian to provide instructions.

Additional Considerations for Rental Properties: Limited Liability Companies

We frequently counsel clients who have rental properties to place such property into a limited liability company (LLC). Property ownership, especially ownership of rental property, comes with the risk of liability from injuries that take place while on the property, leaving you and your assets vulnerable to claims and/or exposing you and your assets to the risk of lawsuits. If your property is held in an LLC, and it is the only asset in the LLC, your liability is limited to that property, and your other assets are shielded from judgment if the formality of the LLC is honored and assets are kept separate.

Holding properties in trust and an LLC are not mutually exclusive planning techniques. Instead, the property can be placed in an LLC for liability reasons and the revocable trust established for estate planning purposes can serve as the sole member of the LLC. In other words, the trustees hold the LLC and the LLC holds the property. Although the structure is akin to the Russian stacking dolls, it makes sense for a multitude of reasons.

In either case, the trust assets, in this case the property, can easily pass on to your heirs. The trust itself may also continue with the trust assets managed and payments continued to the trust’s beneficiaries. What’s more, if your heirs decide to sell the property, they can do so easily and earn and retain money for that sale.

Life Happens: Realtime Action to Prevent Future Hassles

It’s important to remember that taking action now will prevent issues from complicating your children’s lives in the future. At Phelan, Frantz, Ohlig & Wegbreit, we are here to help you pass your property on to your beneficiaries easily and cost-effectively.

Call us at  (908) 232-2244 to develop an estate plan that will give you the peace of mind you need today, knowing your heirs will be well-protected tomorrow.

Selling Your Home? Keep Your Eye On the Ball to Get From Contract to Closing

Selling your home is a major undertaking, and there are many tasks required to move from contract to closing. If you take your eye off the ball, a lot that’s preventable can go wrong. Heed these reminders to prevent your home sale from coming to a screeching halt.

It’s All in the Pricing: Make Decisions Logically, Not Emotionally

2020 has been an epic year for the suburban New Jersey real estate market as city dwellers flock to the suburbs, in large part because of COVID-19. The increase in prospective buyers led to bidding wars which in turn led to many houses selling for tens of thousands of dollars (sometimes more!) over the listing price. Higher than normal pricing worked for sellers if their buyers were purchasing without a mortgage but against them when buyers needed to borrow to complete the sale. Because comparable pre-Covid sales could not support the high selling price, in many cases a lender’s appraisal did not match the agreed upon purchase price. This puts the parties in a position of having to scuttle the deal or renegotiate the purchase price if a buyer cannot or is unwilling to pony up the extra cash or restructure the terms of their financing.

It’s important to remember that price is a reflection of market circumstances, past sale performance on comparable properties and what the current lending market will bear. You must temper the excitement of bidding war reality and bring your house to market at a fair and reasonable price. Pricing your home is one situation where following just your pocketbook can get you into trouble and leave you holding the bag on what you thought was a done deal.

Freeze Your Equity Line

Unlike a conventional mortgage, a home equity line is like a credit card that can be used by a homeowner to make purchases that have no relationship to the property. However, the line of credit is secured by the property and the bank that extends the credit has a lien on the property as a means of insuring they are paid back.

Although the proceeds of your sale can be used to pay off your home equity loan balance at closing, the title company and buyer’s attorney will require that the line has been blocked or frozen from future use well in advance of closing. This prevents a seller from making a last minute, high-price purchase which is not reflected in the payoff amount and prevents the release of the bank’s lien. It often takes banks weeks to issue formal confirmation that a home equity line has been frozen. And while your attorney may be able to obtain the payoff amount, she will not be able freeze your home equity line for you. To avoid closing delays, homeowners should request a “freeze letter” well in advance of closing.

Dig out the Paperwork: Poor Recordkeeping Could Get You Into Hot Water

Decreasing interest rates have caused many homeowners to refinance their mortgages, and you may be one of them. In any refinance or lender change, documentation is required at the conclusion of each loan to verify that the loan has been properly discharged. It’s wise to have these documents on hand to move your real estate deal forward. Left undone, a title search may reveal undischarged liens on your property and, once again, prevent your buyer from getting clear title. This is another potential obstacle that can be prevented by keeping records related to all refinancing and associated loan payoffs through your period of ownership.

Cover Your Bases: Get the Necessary Certificates From Your Town

Two key municipal certificates may be required to move your closing to final: the fire inspection certificate that confirms your fire alarm system, carbon monoxide warning system and fire extinguisher are functioning properly; and a certificate of occupancy. Failure to schedule inspections confirming that everything is up to speed can delay your closing. Your realtors typically will arrange these inspections, procure the documents and deliver them to your attorney in advance of closing. If, however, you’ve sold your house on your own, you will be responsible for arranging the inspections and getting the documents. No documents, no closing. So make sure these items are on your closing preparation checklist, and this includes reaching out to your realtor to make sure they’ve taken care of this detail as well.

The Past Can Haunt You: Disclosures and Permits are Necessary to Complete the Sale

happy couple with SOLD sign

Diligence leads to succesfull sale

If you’re like many homeowners, you’ve likely made improvements to your home during the time you lived there. Relatively minor renovations, like replacing flooring or countertops, can generally be done without obtaining a permit from your local municipality. But major projects like a new roof, an addition or other structural work, electrical or duct work, water heater or HVAC replacement may require a permit prior to getting started. The permit is more than a rubber stamp. The permit means that your town knows that the work is being done and inspected the work upon completion of the project to confirm it has been done to code. You should file an Open Public Records Act (OPRA) request with your town’s building department when you list your home to confirm that all permitted work has been properly closed. If your prospective buyers find an open permit first, it may be difficult for you to schedule the appropriate town inspections to get the permit closed before your scheduled closing.

Be Ready for the Final Walkthrough: Do What You Say

The final walkthrough is the inspection that takes place a day or two before closing. The walkthrough is designed to make sure that repairs negotiated in the original home inspection have been completed, that all major mechanical systems are still working properly, and that the items you committed to leaving for the buyer in the contract (e.g., refrigerator, washing machine, a wall-mounted TV, etc.) are still in the home. Your house must also be in the same condition it was when you signed the contract with the buyer and there can be no physical damage from the move.

During the final walkthrough the buyer makes certain that all repairs negotiated in the original home inspection have been completed. Typically, receipts or other documentation of completed remediations are turned over to your attorney following your receiving an inspection checklist and negotiation on the items that will be completed. Forgetting to actually complete an inspection item or shortcutting the solution by completing it sloppily can cause your buyer to put the brakes on closing. Failure or forgetfulness in doing what has been required in the home inspection can delay closing and how long the delay or whether the deal will be canceled will depend on the magnitude of the issues involved. Alternately, you may have to make a financial concession to the buyer which lessens your profit. Money may also be held in escrow until the appropriate remediations are made. But if you and the buyer can’t reach agreement, your closing stands the risk of delay. And because omissions such as these may interfere with the trust with which your buyer approaches the deal, you risk your sale being terminated.

It’s Not Over Till It’s Over

When it comes to selling your home, no truer words were ever spoken. If you want to get from contract to closing, you need to cover all your bases. Think reasonably. Be on top of every detail. Follow through on everything you say. It’s only then that you can be certain that you have done everything you could to ensure a successful sale experience and enjoy the freedom to move on to your new home.

At Phelan, Frantz, Ohlig & Wegbreit LLC, we understand that selling your home is a huge and important undertaking. We are here to guide you in your decision-making and ensure that you complete all the proper steps that lead to a successful sale.

Call us at 908.232.2244 and enjoy the seamless selling experience that will ready you for your next passage.

Enroute to Your New Home: You Could Be Headed for a Buyside Flop Without the Appropriate Due Diligence

It’s a crazy real estate market right now in large part thanks to COVID-19. In the tristate area, people have been flocking from the city looking for suburban surroundings in which to raise their families. Eager buyers have bid up prices as they vied to land that very special house they were determined to call home. It’s been an exciting, heady time, and for both buyers and sellers, there were many happy outcomes.

It’s always gratifying to see clients achieve what they set out to accomplish. Unfortunately, however, not all the stories have happy endings. Sometimes buyers get so set on a particular house that they’re willing to cut corners to have their offer accepted. But as human nature can sometimes show us, over-eagerness can cause even positive events to turn sour. In matters of the heart, that could lead to a bad marriage. And, in real estate, much like with love between partners, acting too quickly, can cause deals to go south.

There are standard precautions you should take in doing your due diligence on a new home that can prevent a deal breaker from turning up too late. We can’t guarantee that taking these precautions will prevent you from being disappointed if you uncover an undesirable issue that prompts you to withdraw your offer. But thoughtfully approaching what is likely to be one of the biggest purchases of your lifetime will save you from the risk of lost time, lost money and an abrupt end to your transaction that may have steep financial consequences and the lost opportunity to bid on something else.

Here are three instances when moving too quickly and without appropriate due diligence could cause your real estate deal to implode.

Decommissioned Oil Tank: Far From Buried Treasure

Back in the day, the trend was for homeowners to convert from expensive oil heat to gas. To do this, the practice was to decommission the oil tank – most often located underground – by pumping out the oil and filling it with sand.  Fifteen years ago, there was no reason to worry—or so it seemed.  In most instances, this practice was sanctioned by town inspectors and environmental regulators. We have since learned, however, that many of the decommissioned tanks had holes and had leaked before they were decommissioned. For this reason, industry standard today dictates that even properly decommissioned tanks be removed.

Particularly in and around Union County, it is recommended that every potential home purchaser conduct a scan for underground tanks during the inspection period. Discovery of a tank can derail a transaction, particularly if the parties were intent on a quick close. If the tank is pulled and found to have leaked, soil remediation must take place and the New Jersey Department of Environmental Protection must review the test removal, remediation, and test results in order to issue a No Further Action letter sanctioning the work that was done.

Anxious buyers might be tempted to take a credit for tank removal to allow the sale to go through. But underground oil tanks represent an unknown financial liability. Remediation is costly, and it’s difficult to predetermine the cost without testing. A small leak can cost $5,000.00 to $10,000.00—larger leaks tens of thousands of dollars.

Even worse, you could close on the property and move into a nightmare: discovery of an active spill that has reached the water table. What if traces of the oil get into your new next-door neighbor’s water? Contractors are telling you that you could be spending $120,000 or more to clean it up.

If you’ve set your sights on an older home that weathered the transition from oil to gas, it’s imperative to hire an independent environmental company to test the soil and the tank for leaks and corrosion. A written report certifying that the tank hasn’t leaked and tainted the soil is the only proof that can guarantee that the property has not been compromised by oil.

Waive the Appraisal Contingency: Pay a High Price for a Low Appraisal

Appraisal contingency is a mustThe appraisal contingency is very important when you’re financing your purchase, because lenders rely on the value of the home in determining how much money they will loan you. Buyers seeking to borrow 80% of the purchase price need the home to appraise at full value or else they face having to restructure their financing, pay private mortgage insurance, or find ways to come up with additional cash to close. That said, waiving the appraisal contingency has become a trend in a highly competitive market as a way to beat competing bids from other buyers. It is important that you fully understand what you are giving up if you intend to take this tack. Do you have funds to make up the out-of-pocket difference? Or, even if you have the money, would paying extra eat up your cash and/or savings?

Understanding the Importance of the Title Contingency and Title Insurance.

A title search will dig up all kinds of information—things like if there are any liens on the property or, believe it or not, that a third party has an interest in your home. A title search may reveal that the seller has failed to pay their income taxes for a period of time, leading the IRS to put a lien on their home. If the seller also has a mortgage, it may be that the proceeds from the sale are insufficient to cover the amount due on their mortgage and the amount owed to the IRS.

In another troublesome scenario, a title search could reveal that a distant relative, or an ex-spouse, actually has a claim to the home’s ownership. The third party can rightly say that the seller did not have permission to sell the house to you. If that happens, a judge could support the party’s claim.

Part of the title search includes paying for a survey of the property to make sure there are no encroachments (from neighboring fences or sheds) or easements on the property that interfere with its use.  Some buyers are reluctant to pay for a survey, feeling it is an unnecessary additional cost among the many expenses of buying a home. Reluctance to obtain a survey to save a few hundred dollars can have a tremendous impact, however, if these issues later are discovered.

The title search gives everyone a chance to eliminate trouble spots before proceeding with the sale—or to call the sale off, if anything too serious is uncovered. The title insurance policy purchased during the transaction provides future protection if these issues arise after closing. The important thing to remember about not cutting corners on the insurance is that you must purchase title insurance to protect you as well as your lender.

Long story short, it is not worth it to cut corners in purchasing a house, even if you believe it to be the home of your dreams. If you waive any of the above protections, and then find an issue that leads you to want to terminate, it can create a dispute with the seller about the legitimacy of your termination and may put your deposit at risk. Trust that there will always be another property if the first one doesn’t work out and protecting yourself is the best path forward.

At Phelan, Frantz, Ohlig and Wegbreit, LLC we want nothing more than for you to have a seamless closing and a purchase that gets you the house you want. But we also know that moving too quickly and without the proper due diligence can result in financial consequences, lost time and the huge disappointment of a transaction that could be abruptly terminated. While ultimately, decisions are yours, we want to remind you that contingencies, inspections, and title insurance are rights to which you’re entitled. Our guidance is always to exercise the due diligence activities appropriate for your transaction and circumstances. Because our goal remains constant: enabling you to purchase the home you want and being in the position to fully enjoy it.

Editor’s Note: This is the first in a two-part series that describes how home buyers and sellers sometimes fail to include important contingencies in their real estate contract and exercise the appropriate due diligence—and they end up with a deal that flops.

Call us at 908.232.2244 to schedule an appointment and turn your homebuying dreams into reality.

To Transfer or Not: Should You Deed Your House to Your Adult Children?

Thorough Research, Careful Evaluation and Attorney Consult Can Help You Decide

“Should aging parents transfer their home to their adult children?” You’ve probably heard others, perhaps even your friends, ask this question. This is a topic that also frequently makes the news.

The answer: There is no one “right” answer. No easy answer.

The best guidance is to diligently do your homework and consult your estate attorney. Research the pros and cons of a house transfer from a parent to an adult child. Then, determine how the implications of the transfer will apply to your particular family situation. It’s only then that you’ll be positioned to make a decision that works for you and your family.

Preserving assets: a top priority

The most important consideration is to preserve assets. A house is typically your largest asset, especially if your mortgage is fully or significantly paid off. It is, therefore, undesirable to put a drain on any of your assets while you are alive but in need of the long-term care that can bankrupt you financially or force you to sell your house. In these situations, people often wish to seek relief by turning to Medicaid, the joint federal and state program that helps people with limited income and few assets cover health care costs.

Puzzling over Medicaid and some misconceptions

People often think they are ineligible for Medicaid coverage of nursing home costs and doctor’s bills simply because they own property or have some money in the bank. They believe that getting their home out of their own name will enable them to receive the benefit more easily and often use it as a go-to strategy. The reality is, however, that the transfer of assets can have wide-ranging impacts which, in the end, can impact your ability to be considered eligible for Medicaid.  What’s required is understanding the rules and making a legal and financial plan, typically with legal and financial professions, to ensure they are met.

Medicaid eligibility requires that an individual’s combined assets be less than $2,000 in order to receive help with payment for care. In certain situations, your home is not considered a countable asset for Medicaid eligibility purposes, especially if you, your spouse, or a dependent relative continues to reside in the property.

Medicaid’s five-year lookback period is perhaps the largest factor that must be considered. Any gifts or uncompensated transfers that have been made in the five years immediately prior to the Medicaid application will result in a penalty period and delay eligibility for months, even permanently. Therefore, an ill-timed transfer could penalize an individual rather than enhance eligibility.

Still, there are circumstances in which it is legal to transfer a house, but these circumstances often come with a double-edged sword. You may freely transfer your home without incurring a transfer penalty to:

Adult daughter with elderly parents

That being said, Medicaid can put a lien on your house for the amount of money spent on your care. Similarly, if the house is sold while you are still alive, you will likely have to satisfy the lien by paying back the state. There is also an option called estate recovery which under certain conditions allows the government to recover the cost of your care from your estate.The appropriateness of a decision to transfer one’s home for Medicaid purposes is one with which many seniors and families struggle. More often than not, it’s a choice dependent on an individual’s unique circumstances and the real-time monetary values involved in a situation.

For example, a typical scenario which could favor moving the home out of a couples’ name may involve a 70-year-old couple, say, a healthy wife and a husband suffering with Alzheimer’s. The cost of the husband’s long-term care may be exorbitant and the wife will need money to live on herself.  And there is always the desire to leave a financial legacy of their hard-earned money for their kids and grandchildren.

Avoiding a hefty tax bill with a Will or Trust

Taxation is another reason you may give thought to transferring your home to your adult children. In lieu of simply handing over the deed to your son or daughter, there are other ways to transfer your home out of your name. The fact is that gifting your home can involve a hefty bill that taxes your son or daughter on the capital gains derived from your home’s increased market value.

Say you bought your home 50 years ago for $25,000, and now it’s worth half a million dollars. That $475,000 increase comes with a huge tax hit for your kids on the capital gains earned between the purchase price and the current market price. That tax could be avoided if they inherit the property after you die. In the latter scenario, your kids will receive what’s called a step-up basis equal to the value of the house at the time they inherited it rather than the value of the house at the time you purchased it.

Worrying needlessly

People are also skittish about probate and sometimes rush to judgement and transfer their home willy-nilly to their kids. In reality, in most states—New Jersey among them—probate is nothing to fear. In fact, most states even have simplified probate procedures for smaller estates. If you are really worried about probate, you can also establish a living or revocable trust to avoid probate—not estate taxation—but this may not really be necessary depending on the cost and complexity of probate in your estate.

Probate is quite expensive and time-consuming in only a few states, such as California and Florida. In those states, as well as in the situation in which you own homes in more than one state, you may want to work with your estate attorney to develop strategies for wealth transfer. In general, however, many individuals perceive probate as something much more daunting than it actually is.

Trusting your kids: a must

One of the most important considerations for you when reflecting on how to treat your home centers on the conversations you have with your children about your intentions regarding your assets. If your objective is to keep the house in the family, it’s essential that you trust that your adult children are aligned with that value especially while you are alive.

This goal is often compromised when adult children live out of state and feel increasingly detached from the home in which they were raised. They could also be facing their own, sometimes extreme, financial difficulties which could subject your home to liens and/or require your adult child to sell your house to satisfy his or her creditors.

Then, too, if your child divorces, your house could be considered an asset to be divided or dealt with as part of the property agreement with his or her former spouse. Finally, there are health situations in which a transfer could work to your adult child’s disadvantage. Your grandchild, for example, could become disabled and require Medicaid or other government benefits. The fact that your adult child owns your house could prevent your grandchild from qualifying for those benefits.

At Phelan, Frantz, Ohlig and Wegbreit, LLC, we are here to help you navigate these challenging conversations and decisions so that you can better evaluate your options and determine the best way to preserve your assets, among them your home. We will help you gain clarity around your unique family situation and will work tirelessly to guide you to effective strategies that will best serve your wishes and the future needs of your family.

Call us at 908.232.2244 to schedule an appointment and ensure that the legacy you leave to your loved ones fulfills your every intention and keeps the best interests of you and your family top of mind.

 

 

 

At the Heart of Your Real Estate Transaction: Our Best Practices Ensure Your Best Interests

The terms curbside and virtual have come to hold important meaning during the Coronavirus (COVID-19) pandemic. Restaurants and other essential businesses are required to hand-off products to their customers curbside, and doctors are holding office visits via telemedicine sessions. In a similar manner, real estate attorneys are meeting with each other or with their clients to hold closings in law firm driveways and parking lots. Indeed, COVID-19 has changed our lives personally and professionally and placed restrictions on the way we live and work.

Our health officials, leaders and legislators tell us that the Coronavirus is not going away anytime soon. Therefore, accepting the limitations of our new normal and making the necessary adaptions to best practices in business and law is necessary both right now and in the future.

Experience matters

In this environment, experience matters. Whether you’re talking business or law, it’s imperative to choose experienced professionals. When it comes to real estate law, you want to work with attorneys who have repeatedly worked with buyers and sellers on multiple real estate transactions of varying degrees of complexity. You’ll also want to know they maintain excellent relationships with other attorneys, because these are the lawyers who will likely represent the other parties in a transaction.

Collaboration for best practice solutions

In mid-March with the lockdown imminent, our attorneys at Phelan, Frantz, Ohlig and Wegbreit, LLC joined forces with a regional group of New Jersey real estate attorneys who dialed in to discuss the public health crisis. Their goal was to anticipate potential pitfalls imposed by the COVID-19 environment and adjust best practices to the new landscape by devising solutions that would ensure their delivery of excellent client service.

The new driveway/parking lot locale for closings was an obvious outcome of these discussions.

But the solutions extended to the important behind-the-scenes best practices that would limit risk and protect you from the potential ways COVID-19 could derail your transactions. Zeroing in on the terms established in attorney review, lawyers have worked collaboratively to create new standard language to address potential pandemic-related issues and level the playing field. Their goal: to ensure that buyers, sellers and the attorneys representing them were playing by the same rules and with likeminded understanding of the contract language.

Beyond-your-control circumstances

Collective predictions have been on target. There’s a chance that a buyer or seller could become seriously ill with the Coronavirus or experience job loss. Either can delay or, even worse, require cancellation of your real estate contract.

In addition, reduction of staff in banks and other lending institutions has also created obstacles.  The lower headcount has delayed mortgage commitment turnaround and proven that now more than ever lenders are driving closing timetables. Municipalities and to a lesser extent home inspection firms have also been reducing staff, posing additional obstacles in obtaining certificates of occupancy or scheduling home inspections.

New standard contract language prevents you from being penalized because of changes in health or job status or delays caused by slower processes. These are all circumstances beyond your control that must nonetheless be circumspectly crafted for a just outcome. For example, we use specific language to prevent ambiguity and avoid broad wording like impacted by COVID-19 to discourage change-of-heart decisions that use Coronavirus to let buyers or sellers too easily off the hook.

Clarity an imperative

These additional contract components may make your real estate contract seem complicated, so it’s imperative that you understand the terms outlined in the contract before you sign. Your attorney must clearly define the scope of the permissions and limitations related to issues surrounding COVID-19 and set clear expectations about what will be reasonable in both negotiations and timelines in the current environment.

Also, if you are a first-time buyer, it’s important that you become familiar with the implications of mortgage signing and tax escrow and/or the realities of home inspection and title.  The parking lot is not the best place to explain these items, especially last minute. Zoom meetings may not fully replace the law firm library and conference table for face-to-face discussions. Still, they are currently the best venue to iron out contract details and reinforce understanding, even of simpler matters such as why greater precaution may dictate that less people be present at your home inspection.

Real estate market: still active

Despite the challenges of the current environment, we have seen that the real estate market is active, and homes are still being bought and sold. While the spring market has not been as robust as in the past, some real estate industry experts predict a stronger than usual summer market. This we are told follows the trend for families to exit the cities and move to the suburbs. As this continues, parents will likely want to be settled in before school hopefully starts in the fall.

If you’re buying or selling a house in the current market, keep these three takeaways in mind:

At Phelan, Frantz, Ohlig and Wegbreit, LLC, you can rest assured that we will act in your best interests throughout your real estate transaction. From contract negotiations, through inspections, and to your mortgage and financing requirements through closing, we have the knowledge, experience and excellent relationships to streamline your transaction—even in these challenging times.

Please call us at 908.232.2244 to kickstart your successful home sale or purchase.

THE DEVIL IS IN THE DETAILS OF YOUR REAL ESTATE DEAL

GET AHEAD OF THE SNAGS EVEN IN DIFFICULT TIMES

You’d think with house sales reaching almost six million in the United States over the last few years, the process of buying and selling a home would be commonplace. Perhaps. But real estate contract details are so numerous that they can prove tricky, triggering the well-known adage about best laid plans going awry.

From the moment your real estate attorneys go to work creating and reviewing the contract, you should make sure to understand what you’re signing. A contract is still a contract even in these difficult times— especially if you’re in the middle of a sale. Whether it’s during “normal” times or during our new normal: Ask the right questions. Fully understand your responsibilities. And know your deadlines during the various stages of the buy/sell process. Anything less could throw a monkey wrench into the sales process and delay—even worse, scuttle—your deal.

An important laundry list of real estate contract details

Many state realtor associations have developed a boilerplate contract that features a laundry list of details. These include:

While our attorney review systems—even closings—may be virtual during this pandemic crisis, the contract requirements will not change.

The big three: common real estate contract contingencies

Typically, real estate contracts include contingencies, actions the parties must perform and complete for the deal to close. Contingencies reduce risks for buyers and sellers and give either party a chance to legally back out of the purchase under certain circumstances that will make it difficult for them to complete the sale.

The three most common contingencies require buyers to initiate certain actions:

During the pandemic, the practices around contingencies may require virtual rather than face-to-face handling. But the resolutions around each contingency remain the same. Following the home inspection, financing and appraisal contingency reports buyers and sellers may have to renegotiate terms. For example, following the home inspection, the buyers may request repairs that sellers refuse to make; the buyers’ loan application may be rejected following the underwriting evaluation; or in the case of the appraisal, the market value of the home may fall below the amount needed to support the buyer’s loan application. If the parties cannot compromise, they may legally walk away from the deal.

As for the title contingency, a title search can reveal unknown situations which make transfer of title to the buyer difficult—and sometimes irresolvable. Overall, according to Homelight, 11 percent of closing delays come from title issues. More startling, they may come as a surprise.

In a typical situation, the title company will review the title on the purchase property and resolve any issues. But there can be worst case scenarios. Say the title reveals that an easement falls on the property line right where a buyer wants to build a fence or put in a pool. Liens or debts can also cloud a title. The title contingency gives buyers a way out of the contract.

A buyer’s favorite

One additional contingency, the home sale contingency, is a favorite among buyers. This contingency allows buyers a specified period to find a buyer for their current home. If they can’t find a buyer within that time, they have the freedom to walk away from the sale.

Unfortunately for buyers, this contingency isn’t loved by sellers who risk taking their home off the market for little-to-no assurance that the buyer will ultimately be able to complete the purchase.

As a buyer, you can still choose to include it but recognize that it can weaken an offer, especially in a hot market.

Meet deadlines and don’t get cold feet

Contract contingencies and the outs they provide are one element to the contract. But buyers—and sellers—can’t simply get cold feet and bail. What’s more, buyers’ feet are held to the fire to meet all target dates. In addition to a timeframe for scheduling the home inspection (typically 14 days from contract signing), this includes deadlines such as:

In worst case scenarios, failure to perform on the contract can result in breach which occasionally can turn into a battle over any earnest money deposit.  A seller may seek to retain the deposit to cover any damages, although likely will have to initiate a breach of contract claim to receive any money.   Both parties should seek to avoid this result.

Final walk-through surprises

It’s incumbent on sellers to leave their homes in the condition specified in the contract. Buyers verify the sellers’ compliance during the final walk-through. Truly the time when the rubber meets the road, this inspection is an important part of the sales process. It is also one of the most common causes of a delayed closing.

Anything from the home not being empty, to it being damaged from the move or dirty, to property that’s missing but specified in the contract (e.g., a seller promises to leave the washer and dryer but inadvertently takes it), to negotiated repairs left undone…these are among the things that can wreak havoc near the end of the sales process.

Not over till it’s over

In fact, sometimes even closings go awry and, believe it or not, many of them do. For example, the closing can’t go through unless a closing disclosure form is signed by the buyer. If this form is to be signed on time, the title company or mortgage lender must send the document to the buyer no later than three days before closing so that the buyers can review it thoroughly and understand what they’re signing. If your closing is scheduled for Friday, the buyer must have the CD in hand by Tuesday or you’ll have to reschedule the final paperwork.

As crazy as it sounds, sometimes the seller and buyer get their signals crossed about move-in day timing. Realtors have reported that they’ve had moving vans in the driveway and the buyers crying because the sellers have not yet moved out.

And among the worst of situations that can disrupt closing: buyer financing issues. Over a third of closing delays may put your sale at a stalemate. With the business shutdowns of the current pandemic, your buyers could lose their sole source of income abruptly and unexpectedly. Or, in more stable times, the buyers could simply go on a shopping spree to furnish their new home. Either of these scenarios could cause the lender to question the buyer’s ability to keep up with mortgage payments.

ATTORNEYS HELP NAVIGATE CONTRACT DETAILS

From offer to final signature, a home sale requires a million little details to come together without a hitch. By working with your agent and your real estate attorney you will not only come to understand the contract but also anticipate snags. Whether it’s during “normal” times or during our new normal, understanding the contract details will enable you to be proactive rather than reactive, expect the unexpected, over-communicate, and act quickly to address problems. There’s no better path to a no-glitch closing

At Phelan, Frantz, Ohlig & Weqbreit, LLC, we’ll help to provide the education, insight and perspective about your real estate contract and your transaction. Please call us at 908.232.2244 to learn how we can assist you to effectively, efficiently and successfully navigate from offer to closing.

Your Real Estate Contract: Let Reason Be Your Guide for a Successful Transaction

There’s more than meets the eye when it comes to your real estate contract. Its well-laid out terms may seem concrete, but, in reality, they can lend themselves to differences that make for a potentially tumultuous deal.

The contract that governs the transaction assumes a standard of objective reasonableness. Objectivity is hard to define when you are buying your first home or selling the home where you raised your kids. Accordingly, the success of a deal relies heavily on the buyers’ and sellers’ ability to appreciate and understand the other side’s point of view. Ridiculous demands or senseless obstinacy will get in the way of your sale or purchase. Buyers and sellers should approach the transaction with a view towards reasonable negotiations to achieve a successful closing.

A lot of human nature

The contract protects buyers and sellers by laying out the parameters of the transaction. It earmarks the timelines, conditions, and action items that must be met and performed by both parties prior to closing. Still, there’s a lot of movement underneath, around and in the middle of these three categories. With a whole lot of human nature in the mix, plus the involvement of lenders with their independent timeframes, the combination can be deadly.

Learning about the process before entering into a transaction can prevent you from being blindsided by any unexpected pitfalls. Increased awareness also gives you the time to prep and plan some strategic responses if and when the going gets tough.

Your real estate broker and attorney are the perfect partners to help educate you and to guide you as you navigate the process. Seek out professionals who put your interests first. Ideally, they’ve already represented both buyers and sellers. Because they’ve viewed real estate deals from both sides, they bring a broad perspective to your transaction and can share helpful insights from both sides.

They can also prepare you for some unexpected pitfalls you may encounter along the way. Of the three primary contract contingencies—the home inspection, financing, and title—the inspection and financing are the areas in which emotions run high and people can get stuck in the weeds.

Potential Snag 1: Inspections bruhahas – the negotiation within the negotiation

Purchase agreements are typically contingent on the buyer’s satisfaction with a third-party home inspection, which is requested and paid for by the buyer. Following the inspection report’s findings, buyers and their attorneys may request remedies from their seller. Sellers must respond to the buyer requests and can agree to make the repairs, legally refuse to make them, or agree to make some and not others. If the seller refuses some or all of the repairs, the buyer can withdraw from the sale. Alternately, they can compromise.

The dance between the buyer and seller in this regard centers around the question of whether the repair being requested constitutes a “material defect” under the contract. Typically, material defects involve issues with a system or component of a residential property—think furnace, HVAC system or roof—that may have a significant, adverse impact on the value of the property. It may also pose an unreasonable safety risk to residents. Faulty plumbing, a leaky roof, mold, the presence of radon or insect infestation are among the items that are considered material. Paint colors, bathtub drains or unappealing light fixtures, for example, are not.

The debate about the materiality of a defect in the gray area in between these examples is where the dance is most intense. Sometimes buyers don’t understand they are buying a used home and not a new one that’s free of flaws. In turn, sellers view the buyers as unreasonable with too-high expectations. But no matter how mad they get about the buyers’ demands, they need to weigh the cost and hassle of making the repairs against the ultimate outcome of selling their current home. Experienced brokers and attorneys can help the parties navigate these conversations and offer perspective that can save a transaction.

Potential Snag 2: issues with your lender

Many buyers submit a pre-approval with their purchase offer, leading some sellers to believe the proposed purchasers are rock solid financially. It is critical, however, for both parties to recognize that a mortgage pre-approval, typically issued after a cursory review of finances by a lender, is not a commitment to lend money and never guarantees the buyer’s ability to obtain financing.

Banks tend to move at their own pace in the commitment process rather than focusing on the on or about dates detailed in the contract. The wait time can cause buyers and sellers to be on pins and needles. The deafening silence can make sellers think the worst and lose trust, because they wonder if something is going on that is either troublesome or less than transparent—or both.

Part of the process also includes a determination by the lender of the value of the sale property. The appraisal’s failure to equal or exceed the listed value of the home can create an additional obstacle to closing. The buyers can make up the difference by ponying up more money. Or, they can try to negotiate a lower purchase price with the sellers. While this may be a more appealing option than having to relist the property, incur additional carrying costs, and look for new buyers, sellers often have their hearts set on a dollar amount they want or need to take out of the sale. They also can get hung up on the emotions attached to their home.

As a protection for buyers, most contracts include a financing contingency which allows buyers to back out of the deal if they cannot obtain necessary funding. Contract clauses such as these are designed to protect buyers and sellers. Though they do indeed offer protections, backing out because of an inability to compromise could be considered a needlessly self-destructive reaction to a problem. In the end, nobody wins.

So a lot can go wrong

A lot can go wrong if buyers and sellers fail to act with reason.

There are no guarantees that your experience on the road to closing will be hassle free. Still education, preparation and alliance with trustworthy experts along with a strong dose of self-discipline can keep you thinking on your feet. At the end of the day, if you approach your deal with reason, you’ll stay on course to closing and the exciting passage beyond.

At Phelan, Frantz, Ohlig & Weqbreit, LLC, we’ll help to provide education, insight and perspective in your real estate transaction.  Please call us at 908.232.2244 to learn how we can assist you to effectively, efficiently and successfully navigate to closing.

 

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