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AARP sues Wells Fargo, Fannie Mae over reverse mortgage foreclosure

AARP’s legal battle against wrongful reverse mortgage foreclosures has shifted from government regulators to lenders.

The AARP Foundation Litigation unit filed a class action lawsuit yesterday against Wells Fargo Bank and the Federal National Mortgage Association (Fannie Mae), charging that they failed to allow surviving spouses and heirs of reverse mortgage borrowers to purchase the property for the appraised value after loans came due — typically after the borrower’s death.

AARP’s litigators won an earlier round on reverse loan foreclosures in April, when the U.S. Department of Housing and Urban Development (HUD) reversed itself on a rule that was forcing spouses borrowers into foreclosure.

At the heart of the dispute is what happens to the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), which is regulated and insured by HUD passes on to a spouse or an heir. The HECM is designed so that borrowers can never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.

AARP’s litigation against HUD sought foreclosure relief for spouses of deceased reverse mortgage borrowers. It charged that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That meant that if the spouse dies, the surviving non-signing spouse would have to repay the full outstanding HECM balance, even if the home’s value had dropped.

HUD also changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only “arm’s-length transactions” would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95 percent of appraised market value.

The first AARP lawsuit alleged that, as a result of the rule, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property. The lawsuit argued that the rule violates other HUD rules and existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.

Tax, market conditions ideal for gifting a home

When Alice (who asked that her real name not be used) and her husband bought their vacation home 1983, they knew it was special: a 4,500 square foot beachfront house in the Crystal River, Florida area, with views of the sunrise, the sunset and the Gulf of Mexico.

After 55 years of marriage, Alice’s husband passed away in 1999 — the same year the couple put the home in a Qualified Personal Residence Trust, or QPRT. That way, she could pass it down to her sons and not incur huge hits on estate and gift taxes.

“We told our advisers that we wanted to pass this property down to our children, and for them to their children,” says Alice, who is now 91 — and still stays at the home with her family. “They suggested this as a way to get it out of our estate at a reduced value.”

Now, estate planners and wealth managers aren’t particularly known for displaying irrational exuberance. But that doesn’t mean they don’t get pumped when they see a chance for clients to have their proverbial cake — a sweet vacation home in Florida, for example — and eat it, too.

They get that kind of rush now with the QPRT, which allows a person or couple to gift up to two homes (in most cases, to children), yet still live there. And while QPRTs have been around for some time, experts say they’re making a comeback, largely because the clock is ticking on multimillion dollar IRS exemptions that make this strategy a major tax boon.

In December, Congress extended Bush-era tax cuts, keeping estate and lifetime gift tax exemptions at $5 million. But on Jan. 1, 2013, the extension expires and those limits (along with one for the generation-skipping transfer tax) return to $1 million, unless Congress intervenes. What’s more, homes once worth $5 million and up may be worth less today, thanks to the post-2008 real estate slump.

“This is one vehicle to look at right now,” says Madaline Creehan, a principal and wealth adviser at BAM Advisor Services in St. Louis. “It’s a rare opportunity. Absolutely, this could be the perfect time.”

Tax lies? 3 myths you need to know

Although Mark Twain once said there are “lies, damn lies and statistics,” when it comes to U.S. taxes, statistics can tell the truth.

It’s been a decade since the first round of Bush-era tax cuts and it’s clear that — even in the wake of a new round of cuts late last year — employment growth is still dismal. Lost tax revenues trickled up to those who needed it the least, the deficit ballooned even more and the housing market is still punch drunk.

As Congress wrangles over whom to tax — and whom to untax — there are an abundant number of myths floating around. Here are my top three:

The Mortgage Interest Deduction promotes homeownership It may, but it largely benefits affluent taxpayers and does little to reduce housing costs. Since most taxpayers don’t even itemize, the majority don’t even get this break. According to the Tax Policy Center, this break only saved the typical middle-income household about $215 on average last year, or the cost of a modest smart phone.

Next year, the mortgage deduction will cost the federal Treasury $131 billion, making it one of the largest tax “expenditures.”

Many economists have argued that the mortgage break inflates the cost of homes. Canada, which has roughly the same homeownership rate as the U.S. — and much higher taxes and a healthier economy — doesn’t have a mortgage deduction. The U.S. write-off can be replaced with a credit that anyone could receive or eliminated, especially on home-equity loan interest and second homes.

Lower tax rates create jobs I have never seen any independent (of partisan think tanks, that is) evidence that this has ever been true. Congress bestowed estate-tax and income-tax breaks on the wealthiest families late last year (and throughout the Bush II years); the unemployment rate has barely budged.

Wrapping up 2010 estates

For those whose loved ones died in 2010, this is the time to wrap up their estates.  Last year was an unusual year — the estate tax disappeared altogether to the benefit of some and the detriment of others. But in its absence, a different capital gains tax emerged. That means anyone sorting out a 2010 estate now gets to choose which tax to pay.

The choices are to pay the estate tax under its new rules, which allows for a $5 million exemption and a maximum tax rate of 35 percent, or to opt out of the estate tax and elect what’s known as “carryover basis.”  The answer you might think — to opt out of the estate tax — is likely the poor choice for the vast majority of people.

To understand why, step back for a minute. When the estate tax disappeared last year, so too did the so-called “step-up in basis.” This rule allows the “basis” — essentially the adjusted purchase price on which any capital gains would be calculated — to be reset at death. This could be a fabulous deal for the ultra-wealthy who passed away in 2010 (George Steinbrenner, perhaps?), but if your estate isn’t in the multi-millions it’s likely to bring lots of headaches and the potential for paying more tax.

In fact, one of the many reasons that estate tax attorneys and financial advisers were up in arms last year, desite the lack of an estate tax, was that the alternative could have caused many wealthy, but not super-rich families, to owe more tax. Perhaps worse, the 2010 carryover basis rules, which allowed the executor to assign $1.3 million in “step-up” basis (above that allocated to a spouse), also had the potential to spur family squabbling since the executor would have to choose how to divide that benefit if there was more than one heir. (Yes, it’s complicated.)

Thus the fix in the year-end tax agreement: Executors can choose whether to pay the estate tax or not, for 2010 estates only. Those who choose to pay the estate tax will get the exemption and the step-up in basis; those who don’t will owe capital gains based on the carryover basis.

There’s still time to figure it out. Estates typically have nine months after death to file their federal estate tax returns, but the deadline was extended because of last year’s tax uncertainty. The earliest anyone would need to file an estate tax return for a death in 2010 is September 19, 2011, nine months (plus two days to account for the weekend) from the date the tax legislation was enacted.

If you’re trying to figure this out for someone you love who died in 2010, here’s how to think about that decision:

Understanding your life insurance policy

The days of scratching your head as you try to decipher an insurance policy riddled with complex legalese may soon be over.

Sun Life Financial has launched a company-wide campaign to effectively translate technical jargon into “plain language.”

Seventy-five percent of investors say lack of understanding played a significant role in the financial crisis while two-thirds of consumers believe financial documents are intentionally complex to hide information, according to a  Siegel & Gale study.

“It seems we’re guilty in the [insurance] industry of providing technical jargon,” said Michael Murphy, assistant vice president of life product marketing at Sun Life. “We’re trying to establish with people in plain language that even if you’re not wealthy, you really should put together a series of documents. It’s really not just about taxes; it’s about making sure there’s a seamless distribution of your assets that goes to the next generation.”

Estate-planning isn’t reserved for the “super-affluent” but rather for anybody with assets – which is why it’s important to understand what you’re signing.

The following are a few key insurance and estate-planning guidelines that are important to comprehend:

Death and Taxes: Year-end estate tax craziness

Estate taxes affect very few people, but for those with seven- or eight-figure estates that are impacted, the end of this year is a crazy, crazy time.

That’s because going from a year with no estate tax (as 2010, oddly, was) to a year in which the estate tax is back (but with a $5 million exemption and large gifting possibilities) raises all kinds of quandaries for those who are very ill and for their families.

What if staying alive another week would save tens of thousands of dollars in state estate tax because the elderly person had already used up the gifting possibilities for 2010—but not for 2011? Or, if dying after New Year’s, rather than before it, meant paying the Treasury tens of millions more tax? The possible scenarios of spouses and children, second wives and estranged children, large sums of money, and elderly relatives on life support could make a movie.

Cheryl Hader, an estate attorney at Kramer Levin Naftalis & Frankel in New York, has more than one client confronting this year-end madness. In one case, it would be better for the client, who is on life support, to live till 2011 because of state estate tax payments that would be due in 2010, but could be avoided in 2011. In another, it would benefit the heirs if the man was taken off life support, as he requested in a medical directive, so as not to live beyond the no-estate-tax year.

“Whether somebody dies December 31st or January 1st makes a huge difference because the rules changed so quickly,” Hader says. “In some situations it pays to live, and in some situations it pays not to. Its such a bizarre topic that you’re never going to see it come up again.”

In fact, all morbid jokes aside, academics Joel Slemrod and Wojciech Kopczuk found that when the estate tax rules are known in advance to be changing (as they were last year and are again now), people do, in fact, time their deaths so as to save their heirs money. Their paper won them the Ig Nobel Prize (for academic research designed to make people laugh as well as to think) back in 2001. But perhaps there aren’t so many people laughing now.

Estategate 2010: Battle over taxes likely to continue

What’s that old adage? Nothing is certain but death and taxes? Well, not in 2010.

Call it a loophole, a lapse or a hiatus – whatever way you want to spin it, the 2009 Congressional estate tax stalemate meant America’s uber-rich passed their billions on to heirs tax free this year. Or did they?

“We’ve all kind of been having fun with this story and, to some extent, injecting our own fantasy situation. ‘Wow, what would it be like to inherit this much money and not pay any tax?’ but I don’t think we’re really getting a fair or accurate picture of what is happening here,” says Deborah Jacobs, author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. In fact, in the absence of the estate tax in 2010, a capital gains tax rule (that could be more punishing) went into effect.

According to Forbes.com, five billionaires died in 2010:

• George Steinbrenner: net worth $1.15 billion. Former owner of the New York Yankees.
• Mary Janet Morse Cargill: net worth $1.6 billion. Cargill Inc
• Dan L. Duncan: net worth $9.8 billion. Chairman and largest investor in Enterprise Products Partners LP.
• Walter Shorenstein: net worth $1.1 billion. Real estate magnate, founder of Shorenstein Company.
• John Kluge: net worth $6.5 billion. Founder of Metromedia.

So,  how many billions did the U.S. government lose out on this year? That depends on whom you ask.

Experts say it’s nearly impossible to determine the amount of tax revenue lost. A rough estimate from Elderlawanswers.com suggests the stalemate cost the government at least $6.5 billion, counting only four of the five billionaires mentioned above.

Catapult the U.S. tax code from the Middle Ages

The new tax bill just passed by Congress added a few more turrets to a hopelessly medieval fortress.

Each tax break still supports thousands of economic fiefdoms: $6 billion for the ethanol industry, $235 million for Puerto Rican rum makers, $40 million for NASCAR stock car track owners .

Then there are the write-offs that largely benefit the affluent: $498 billion for interest paid, $470 billion for home-mortgage interest, $467 billion for charitable contributions.

True, Congress will help millions by extending unemployment benefits, blunting the impact of the pox-like Alternative Minimum Tax and retaining the Bush-era tax cuts for the middle class in a time when the U.S. is still reeling from the 2008 banker’s bacchanal.

As it stands now, though, the income and estate tax rates reinforce the clout of what is becoming an ancient regime, a class of landed gentry who disproportionately benefit from an archaic tax code.

GOP leaders, for example, insisted that the 35-percent estate tax rate with an exemption for estates under $5 million ($10 million for couples) be part of the package.

While the rallying cry from conservatives was that the estate levy needed to be lowered to shield family farms and small businesses, the nonpartisan Tax Policy Center estimated that only about 100 family farms and businesses paid the tax in 2009, when a $3.5 million exemption was on the books.

A closer look at the estate tax compromise

Lance Hall is the co-founder & President of FMV Opinions. The opinions expressed here are his own.

On Monday, President Obama announced that he had reached an agreement, in principle, with the Republicans on the extension of the Bush tax cuts.  One of the items negotiated was the estate tax.  In this case, the Republicans got what they wanted: a 35 percent estate tax and a $5 million exemption.

Unresolved, however, were certain critical details such as:

* Will the estate tax be retroactive to January 1, 2010 or will it begin January 1, 2011?

* Will the lifetime gift tax exclusion amount be reunified with the estate tax exemption amount as it was prior to the 2001 Economic Growth and Tax Relief Reconciliation Act?

* Will the surviving spouse be allowed to use the unused portion of the descendant’s lifetime gift tax exclusion amount?

4 ways to protect yourself from higher estate taxes

Now that the Washington tax deal is law, most Americans don’t need to worry about estate taxes – so long as they don’t die in the next two years. The agreement between President Obama and Republican lawmakers ends the current uncertainty on estate taxes with an ultra-generous $5 million exemption per individual, with estates over that amount taxed at a 35 percent rate.

But the Obama-GOP tax deal simply kicks the can down the road on both income and estate tax rates into the 2012 election season – and that’s assuming the estate tax provision makes it through Congress.

Next up is a robust debate about deficit reduction between now and 2012 – a discussion that could lead to lower estate exemption levels and higher tax rates just a few years from now.

Estate taxes haven’t been a front-burner issue for the past decade, due to rising exemption rates. Now, that’s changing. “We need to dust this off and think about it for first time in a decade,” says lawyer and business journalist Deborah L. Jacobs. “We all became accustomed to the idea that a huge amount of our estates would be exempt from tax.”

Jacobs, who contributes regularly to The New York Times and a variety of financial publications, recently published a very useful, action-oriented guide to estate planning issues called Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.

I asked Jacobs to comment on the current uncertainty about estate tax rates, and how people can protect themselves against the possibility of lower exemptions and higher rates down the road. She offers the following four “low-tech” estate planning techniques: “They’re very simple, won’t leave you broke, and don’t require lawyers’ fees to implement,” she says.

1. Use life insurance as a hedge. If your estate is vulnerable to estate tax — or becomes vulnerable in the future — Jacobs recommends purchasing a term life insurance policy to cover the projected the tax bill. “If you have a taxable estate, you can buy a term policy to insure that all the money you want to leave to your family isn’t consumed by taxes. Then, if the exemption amount goes up you can let the policy lapse.”