Real Estate Q&A: Revocable Trusts and Wrap-Around Mortgages

Each month, San Diego State University lecturer and Zillow Blog contributor Leonard Baron answers two questions from readers regarding buying, selling and investing. Have a question? Send it to Leonard@ProfessorBaron.com

Revocable trusts

Hi Professor — I keep hearing about trusts and that forming one can be a good idea to save money on taxes and maybe provide liability protection to my assets. What are the basics? Bob. N., Toledo, OH

Hi Bob--

It depends. Here are the basics on the most common trust, a revocable living trust (RLT). State laws differ, but an RLT is set up to allow the trustor (forming the trust) to skip probate court at death. The trustor would title all their real estate, bank accounts, etc., into the RLT, and when they pass away the assets are distributed via what the trustor detailed in the trust. This can also occur via a will, but a will is “probated” in state court, which takes a big chunk of fees for administering the estate. If you have an RLT, which costs about $2,500, the assets in the trust skip being probated, and your estate skips those probate fees — but talk to an estate attorney in your state for more information.

An RLT does not give any liability protection or save money on taxes during the life of the trustor. Other trusts — expensive ones starting at $20,000 and up — could save you money on taxes, hide or protect your assets, etc. But your estate would probably have to be several million dollars to consider these types of arrangements.

Wrap-around mortgages

Hi Leonard — My daughter is considering buying a property with a wrap-around mortgage because she can’t get a regular bank loan. I’m concerned because isn’t the seller violating their mortgage by selling the property and not paying off the mortgage? Any suggestions? Aaron S., Salt Lake City, UT

Hi Aaron-

You should be concerned. Yes, the seller could be violating their mortgage terms. There also could be insurance issues, higher transaction/legal costs and all kinds of other issues with a wrap-around loan.

Many times rent-to-own or wrap-around deals are purchased by people who don’t have the financial wherewithal to do a traditional mortgage from a bank. They mistakenly think that buying “any” property is better than not buying at all — which it’s not! Renting is not throwing away money; buying a bad real estate deal probably is throwing away money.

You should coach your daughter to get into financial shape to qualify for a traditional mortgage, shop all the available inventory in the area and buy when she finds a great property and is ready to become a homeowner.

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Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.