South Carolina Trust
and Estate Law Blog

Over the past several months I have been working on an estate that owns real property.  The property is subject to a home equity conversion “reverse”  mortgage, and unfortunately, the unpaid balance, which became due and payable upon the death of the decedent, is now greater than what the property is worth on the open market.  Thus, a short sale is the only way to proceed, other than allowing the bank (which in this case will remain nameless) to foreclose on the property.

The difficulty I have encountered in trying to accomplish this short sale serves as notice of how regulation of the mortgage market can cause poor economic results.  There is a HUD regulation that requires the short sale price to be at least 95% of the appraised value of the property (the appraisal must be obtained by the mortgage holder, the buyer’s appraisal will not be acceptable.)  There also can be no seller’s concession as part of the purchase price, even if the contract price less the seller’s concession is still in excess of 95% of the appraised value.

I do not understand where the 95% figure comes from, it is quite arbitrary and has no relation to reality.  If the short sale cannot be accomplished, the home will go into foreclosure, which results in increased legal fees, court fees, and service of process fees. The foreclosure price at auction can easily be 75% to 50% of the appraised value.  There is also the issue of the damage that can occur to this home if it remains vacant for very much longer.  So if a purchaser makes an offer of 94% of the appraised value, my contact at the bank says that “per HUD regulations the sales price must be 95% of the appraised value.” Because of this arbitrary 95% limit, more money will be lost in the foreclosure. 

Because the reverse mortgage is federally insured, the bank knows that it will be made whole whether the property sells via short sale or foreclosure auction.  It is the government, and we the people, who are on the hook.  The federal insurance is paid for through mortgage insurance premiums that are added to the cost of the mortgage, so hopefully the burden on the federal fisc is not so great. But the mortgage insurance premium increases the cost of the mortgage in the first place, and reverse mortgages are notoriously expensive.  So, why does HUD have a seemingly arbitrary regulation in place that kills the possibility of a short sale unless the sales price is 95% of the appraised value?  Particularly when we know that the only likely alternative, a foreclosure auction, will result in much greater economic loss, and increased costs for the loan in the first place?

<

A recent development on the federal estate tax.  Senators Kyl and Lincoln are still working together to enact legislation fixing the current estate tax regime.  Under their proposal, the estate tax will return in 2011 with an exemption of up to five million dollars per person, ten million dollars per couple, to be indexed for inflation.  There would be a return to stepped up basis for inherited assets.  The rate of tax would gradually be reduced to 35%.

A novel idea is also to give estates of persons passing away in the year 2010 the choice to either pay estate tax under the new system and receive stepped up basis, or not pay estate tax and deal with the carry over basis rules and the resultant capital gains taxes. Such a decision calls for an evaluation of the economics of paying the estate tax versus paying the capital gains taxes (generally, smaller estates will be better off paying the estate tax and getting the stepped up basis for estate assets, while larger estates far in excess of the exemption would likely be better off paying the capital gains tax).  Such an evaluation would be similar to the evaluation currently undertaken to determine whether it is more beneficial to report estate asset values as of the date of death versus the alternate valuation date.  

Back to my all too familiar refrain on this issue: stay tuned.

First off, this Yankees fan would like to say thank you to George Steinbrenner for his successful stewardship of the New York Yankees over the past several decades.  RIP The Boss.  As a friend of mine said, somewhere in heaven Thurman Munson, Billy Martin, and George Steinbrenner must be having their long-awaited sitdown.

Now to blog business.  From a purely estate tax point of view, George Steinbrenner picked a pretty good year to pass on. There is no federal estate tax this year. The estate tax savings can be measured in the hundred’s of millions of dollars, considering a net worth north of one billion dollars.  I believe The Boss was domiciled in Florida, a state with no state estate tax, which results in additional estate tax savings.   On the other hand, The Boss may have owned some real property in New York, a state that can take a fairly good bite out of an estate with its estate tax.  But with no really good information as to his holdings and estate plan, it would be mere speculation to estimate what the New York estate tax might be.

It is more interesting to think about the possibility that  (Click here for more…)

The death of another celebrity has apparently led to more estate litigation and bickering about who is entitled to the assets left behind. Gary Coleman died on May 28, 2010.  The reporting is raising some interesting issues for probate lawyers.  The bare bone facts, as reported by various news outlets, appear to be as follows:

1. Gary Coleman executes a Last Will and Testament in 1999 and a new Last Will in 2005.

2. Gary Coleman marries Shannon Price on August 22, 2007. Neither the 1999 nor 2005 Last Wills mentions Ms. Price, naturally.

3. In the end of 2007, Gary Coleman executes a Codicil (Amendment) to his 2005 Last Will, giving his entire estate to Ms. Price.

4. Gary Coleman and Ms. Price divorce on August 12, 2008, but apparently continue living together until his death on May 28, 2010.

While the Gary Coleman estate will in reality be subject to the laws of the state of Utah, there are several scenarios that could play out under South Carolina law with this set of facts.  (Click here for more…)

Happy Independence Day everyone! Be safe.