SAVING THROUGH YOUR MORTGAGE ESCROW

If you own your own home, odds are you financed the purchase of the real estate with a mortgage. Usually, the lender requires the buyer/borrower to escrow funds to assure the payment of real estate taxes and hazard insurance. This escrow is funded as part of the monthly mortgage payments — the amount the borrower sends to the lender will include not only the monthly amount of principal and interest, but a prorated amount of the full year’s real estate tax and insurance bills.

However, while the monthly amount paid for principal and interest is usually set for the life of the loan, real estate taxes and insurance bills will change from year to year (and, unfortunately, those amounts tend to always go up). Therefore, the lender adjusts the borrower’s escrow amount annually.

Lenders tend to schedule this annual review of a borrower’s escrow according to their own rules. It might be during the month of the anniversary of the date the borrower closed on the mortgage. It might be on a date the lender arbitrarily chooses each year. If taxes and insurance premiums have gone up appreciably, the lender will adjust the amount the borrower pays to cover the increase. The adjustment could be based on a variety of factors, but the lender will usually make projections based on past amounts, as well as making some future assumptions. The lender will use its own formula to figure this out, potentially leading to a shockingly large increase in a borrower’s monthly payments.

To avoid this, borrowers should contact their mortgage lenders after receiving the actual tax bills or insurance premium invoices, and ask for an analysis and review of their escrow account. When the lender bases its projection on actual concurrent payment information, the borrower may be pleasantly surprised that the escrow amount paid each month might be lower. This is particularly true if the home is located in an area hard hit by the recent economic downturn. If the value of the property has fallen, and the increase in taxes (if there are increases) are not assessed at the same rate as in the past, there is a distinct possibility the lender will determine that the escrow payments can be less. Also, even if the analysis leads to an increase in the borrower’s escrow payments, that increase will likely be less than it would have been if the lender had relied on its own internal projection formulas.

It is possible to have your monthly mortgage payment lowered because you have made a good-faith inquiry with your lender, requesting an updated escrow analysis. Even if this isn’t the result, and your escrow amount increases, at least it will be based on the actual tax bill or insurance invoice, which is at lease objectively justifiable and fair.

All of us have people in our lives who are aging. Grandparents or parents, Uncles and Aunts, people we go to church with, or people we work with. Getting older always has the same consequences – bodies deteriorate, sight dims, hearing is more difficult. Reflexes are slower, aches and pains seem more pronounced, memory issues are frustrating. The decline may start when someone is as young as their mid-50s; others seem to avoid the ravages of aging well into their 80s or 90s  But the process is inevitable.

Often, a catastrophic or life changing experience will seem to hasten the decline. It could be an illness, the death of a spouse, or a major financial set back. The trauma and emotion of dealing with such a turning point seems to add years overnight to the lives of the seniors we care about. We want to help them. And often, that person’s perception of a sudden deterioration will cause them to scramble to get a grip on their lives when things seem to be careening out of control — and that includes “getting their affairs in order” to be ready when they die.

Let’s look at a hypothetical but very real situation. Let’s take your average 45 year old man – let’s call him Joe. He’s married, has children, has a steady job and a positive outlook. He has a decent relationship with his parents, who are in their late 70s, and both retired.

Suddenly, however, there is an unforeseen turn. Joe’s mother falls ill, and before he can even wrap his mind around the enormity of the situation, she dies. Joe’s father is devastated. The sudden and unanticipated nature of his wife’s death seems cruel. He becomes angry and sullen. He retreats into himself, spending most of his time just sitting in front of a television, not socializing much, not seeming to care.

In addition, as the months pass, Joe notices an obvious decline in his father. Its not just depression and mourning. Joe’s father is not taking care of the house. He never seems to have any groceries on hand, or seems to be eating all the wrong things. Joe notices important past due invoices in the stacks of unread mail that are collecting in various places in his father’s house. He also sees his Dad carrying large sums of cash, rolled up in his pockets. Dad explains  that he wants to be sure he has enough money; he doesn’t want to be caught short.  Joe is concerned this could make his increasingly frail father vulnerable to theft or financial exploitation. Joe is at a loss as to how to approach his Dad to try and help.

But Joe’s father beats him to the punch. Joe’s Dad invites him over for an important talk. Joe’s Dad realizes he’s having trouble managing things, particularly his finances. The loss of his wife has also caused him to feel his own mortality, so he wants to talk about the future, and what will happen after he dies.

Joe’s Dad has a plan. He’s been talking with his buddies at the restaurant where he hangs out at on Saturday mornings, and knows exactly what needs to be done, First, he wants to add Joe’s name to all of his bank and investment accounts, so Joe can make deposits and withdrawals, write checks, pay the bills, and help his father keep track of and manage his finances. As for all of the “stuff” he has in the house – that is, his tangible personal property, Joe’s Dad wants to make a list with instructions for how it will be divided among Joe and his siblings after he dies. Then, there is the matter of the house. The mortgage has long been paid off, so Joe’s father owns the place, free and clear. He announces he will simply add Joe’s name and the names of each of Joe’s siblings to the title of the house. This way, when he dies, his children will be sure to inherit the house, and they can deal with it however they want. He’s already gotten a form for a quit claim deed from one of his friends. He insists that a lawyer doesn’t need to be involved. “Let’s keep it simple,” he says. He is determined that there is no need for an expensive estate plan created by an attorney. Joe’s father feels his “do it yourself” estate plans should be enough to carry out his own wishes.

Joe is a bit perplexed. It seems like at least some of his Dad’s suggestions will be helpful. But will carrying out his father’s wishes be the right thing to do? Are these even good ideas?

Each of the three things Joe’s father wants to do represent concepts in estate planning that often do not, or cannot work out as planned. Each is fraught with difficulty and potential negative consequences. Potentially devastating results could be avoided if Joe’s father would consider consulting an attorney for a simple estate plan.

First, consider the issue of the bank accounts. It is not uncommon for an older person to rely on the assistance of a responsible adult child to help manage their finances. Adding a child’s name to accounts with signature authority is a simple, practical way to make this happen. But if that’s all Joe’s Dad does, there could be disaster waiting after his death.

Usually, adding someone’s name to a bank account makes that person a joint owner of the account, with full rights to withdraw the funds — its joint ownership in every sense of the word, with right of survivorship.  Where such a joint tenancy account with a right of survivorship is created, there is a presumption that a gift is intended. Upon the death of one person, the other person becomes the sole owner. The funds in the account are not considered part of the decedent’s probate estate because they pass as a matter of law to the surviving joint owner.

But that may not be what Dad intends. Perhaps Dad did not intend for Joe to get all of the money in his accounts when he died. Instead, Dad wants Joe to divide it equally among all of his children. He only put Joe’s name on the account for the convenience of Joe helping manage Dad’s finances.

The law presumes this money will be a gift to Joe when Dad dies.  But this presumption can be rebutted — but only by clear and convincing evidence that no donative intent existed at the time the joint tenancy was created.

This creates the potential for a great deal of misunderstanding after Dad dies. Joe’s father adding Joe’s name to his bank accounts creates a two sided trap that often results in extremely nasty litigation.

On one side, Joe (who now is in control of Dad’s finances), can manipulate the situation so that he winds up with a significantly higher percentage of the estate, or perhaps all of it. After his Dad’s passing, Joe will argue that the legal presumption of the gift must stand — to the detriment of all of the other siblings. And because of this presumption, it is very difficult for Joe’s siblings to prove Dad’s actual intent.

On the other side is the concept where Joe’s Dad truly does intend to reward Joe with a bigger share of the estate than his siblings. For example, maybe Joe ends up opening his home to his Dad, and Joe’s family is providing care for his Dad through his later years. So Joe’s father arranges to have a larger portion of his funds placed in joint tenancy with Joe, intending for Joe to get every penny, and intending that it be to the detriment of Joe’s siblings. After Dad dies, Joe’s siblings may rise up in righteous indignation, believing Dad must have intended otherwise, and that they deserve more.

What about the written instructions as to the distribution of property? While Joe’s father might believe that Joe and his siblings will honor his wishes, there is nothing to stop Joe to do whatever he wishes with the property. This is because under Illinois law, any written disposition of a decedent’s  property that is not part of a validly executed Will is unenforceable. Indiana law has provisions to enforce this kind of estate planning, but only if Dad strictly adheres to the statutory requirements. Even then, in either case, all Joe has to do is destroy the written instructions as soon as he locates them, and then divide the property as he wishes. There is likely to be no independent verification of Dad’s intent.

Joe’s father’s decision to use the Quit Claim deed to add his children to the title of his house is the most dangerous of all these concepts.

First, a quit-claim deed only transfers the owner’s actual existing ownership rights in the property – it offers no guarantee that Joe’s Dad’s title interest in the property is valid.

A warranty deed, however, offers the grantees more certainty as to what they are getting. A warranty deed promises that Dad owns the land and has the right to transfer it to Joe, that no one else has an interest in the land unless identified in the deed, and that if a claim is made against Joe’s interest in the land after the transfer, his father (or his father’s estate if he has died) is obligated to defend the title in court. If any of these promises turn out to be false, the grantee can potentially recover for the loss. Quitclaim deeds make no such promises. If there was a break in the chain of title years before Dad acquired the property, the title insurance Dad obtained when he purchased the home will not protect against the quit claim deed.

Other quitclaim issues include the perceived informality of using a quitclaim. A layman like Joe’s father might prepare the deed so it appears to be a forgery, or include an incomplete or inaccurate legal description of the property, making the transfer void or creating a cloud on the title.

If the property is mortgaged, will the new owner be responsible to pay the mortgage? If Joe’s father expects such an arrangement, especially if its an informal oral promise, he will remain responsible to pay the mortgage should the children default. Also, a child’s bad credit could become Joe’s Dad’s problem, even if he an excellent credit rating. Making his children a co-owner means their judgment liens become his judgment liens. Mortgages often contain “due on sale” clauses, so that a transfer of any part of the ownership of the property without the lender’s consent is a default, meaning the lender can foreclose. While Federal regulation prevents this result if the property is the homestead, other properties are subject, and if the new owner can’t afford to pay off the debt or refinance, the property could be lost.

Joe’s father might also believe he can hide his own ownership interest in this kind of a transfer, or avoid creditors with a quitclaim. Sorry, it doesn’t work – a quitclaim deed does not extinguish judgment liens.

Finally, if the house is worth more then $14,000.00, or the aggregate of $14,000.00 for each child Joe’s Dad includes in the deed, he could be liable for Federal gift taxes. If the house were to pass as an inheritance after death, the potential estate tax rate is lower than the gift tax, and the capital gains tax realized when an heir sells the interest in the property will likely be less.

Hopefully, Joe is smart enough to take his Dad’s concerns and plans to an experienced estate planning attorney. He would learn that the only document conveying his Dad’s intention that is enforceable after his Dad dies is a validly executed Will. Better still is a plan that includes a land trust or a revocable, intervivos trust (often called a “Living Trust’), which can make the transfer of the real estate after death a simple and painless concept.

We need to help our parents and grandparents avoid the pitfalls and traps that do-it-you-self estate planning will bring. The end result is almost always simpler, easier, and less expensive. I encourage anyone who is “feeling their age” to consult with an attorney for a valid, carefully considered estate plan. But older folks aren’t the only ones who need to consider estate planning. Any adult needs to think about it.

Estate planning is not just for the wealthy. It’s not just for parents who need to provide for children.  It’s for everyone. Estate planning is planning for everything you own and everyone you care about, including yourself. In future installments of my blog and newsletter, we will visit more estate planning topics and considerations. Because even if a person doesn’t make a plan, there is a plan provided under the State’s intestacy laws. These laws are often at odds with what people intend and want. Please – don’t allow your parents or grandparents to rely on a do-it-yourself estate plan. And don’t allow yourself to fall into the same trap. Only a properly drafted and executed estate plan will ensure that your wishes will be carried out after you die.