Understanding The Basics: Buying, selling, financing and building a home in Berkshire County – Part 8

The eighth and final installment of an unpublished book by Great Barrington Attorney David M. Lazan -- everything you need to know if you want to buy, sell build or just dabble in Berkshires real estate.

Editor’s Note: The Edge is serializing an as yet unpublished book by Great Barrington attorney David M. Lazan. Here is the eighth and final installment: The Massachusetts Homestead Act, Nominee Trusts and Short Sales. Previous installments were Introduction and Chapter One: Real Estate Agents and Lawyers; The Purchase and Sales Agreement; Title,Title Insurance,Plot Plans and Surveys; Financing Real Estate;The Closing; Condominiums and Buying Land and Building a Home.

Chapter Eight: The Massachusetts Homestead Act, Nominee Trusts and Short Sales  

The Massachusetts Homestead Act

Homestead Acts protect homeowners from certain creditors, not including lenders. The Massachusetts homestead law, enacted in 1851, was one of the first in the United States to provide for statutory protection to shield a certain amount of equity in a family’s principal residence from the reach of non-mortgage lender creditors. Homestead acts, like that found in Massachusetts, are intended to preserve the value of the family home, encourage home ownership, prevent pauperism and build and stabilize communities.

On March 16, 2011, changes by the Massachusetts legislature to the Homestead law went into effect. They were designed to increase protections that were already in place and remedy certain other perceived deficiencies in that law. As a result, an automatic protection of $125,000 is provided to homeowners where the home is their primary residence. Additionally, if the homeowner files a homestead declaration in the Registry where their home is located, the homestead protection can be increased to $500,000. For married couples, it is no longer required that both spouses sign the declaration of homestead. This is a change from prior practice. Also, same-sex couples now have the same rights and protections afforded all “married spouses” under the Act. If you are a single person and have claimed a homestead and later marry, the homestead automatically protects your new spouse. Homesteads now pass to the surviving spouse and children who live in the home. The homestead law provides no protection from a secured claim such as a tax imposed by the government, criminal fines, support owed to a former spouse or child support obligations. Also, the law does not protect residents from their mortgage being foreclosed.

In the past, when homeowners re-financed their home, there was a question as to whether they needed to re-file a declaration of homestead to retain their homestead protection. With the enactment of the new law, that is no longer necessary. Additionally, homestead protection is available for condominiums, coops and two to four-unit homes. A beneficiary of a trust, where a trustee is holding title to the beneficiaries’ primary residence, can also be protected under the homestead law.

Under the old law, unless the proceeds of the sale of a primary residence were immediately invested in a new primary residence, those proceeds could be at risk to claims by creditors. Now, proceeds from the sale are protected for up to a year, to allow the homeowner to reinvest the proceeds in a new residence. Also, homesteads automatically pass to a surviving spouse and/or children living in the home.

Nominee Trusts

A “nominee trust” is a way of putting the legal title of real estate in the name of a trustee. It is an arrangement often used in Massachusetts by which one or more persons, pursuant to a written “declaration of trust”, declare that they will hold title to real property they acquire as a “trustee” for the benefit of one or more undisclosed beneficiaries whose names are listed in a “schedule of beneficiaries.” The “schedule of beneficiaries” does not get recorded in the public records. The declaration of trust, however, does get recorded in the Registry in the county in which the real property is located.

The nominee trust has been described as creating a principle-agent rather than a true trustee-beneficiary relationship.      Unlike a “true trust”, the trustees of a nominee trust have no power to act with respect to the trust property, except when directed by the beneficiaries.  If title to real estate is held in a nominee trust, a sale of that property can be accomplished by an assignment of the beneficial interest in the trust to the Buyer in which case, no recording of the sale in the Registry is required.

A. Some Purposes of a Nominee Trust

One of the reasons for using a nominee trust is to shield the identity of the true owners of a property. On occasion, I have represented a celebrity, luminary or notorious individual who has desired avoiding exposing their ownership to the public. In that situation, a trustee is named as the title holder for undisclosed beneficiaries.

Another reason for the use of a nominee trust is the ease of transferring ownership interests in property when there are numerous owners, thus eliminating the need to collect multiple signatures. This type of situation most frequently occurs where there are siblings who own property. In that case, a nominee trust is recorded often naming one of the siblings as a trustee. The trustee then takes title and may execute a deed conveying or mortgaging the property and certifying that he or she is doing so at the direction of the beneficiaries. When the beneficial owner is a corporation or limited liability company, the need for assurance of corporate authority may be eliminated.

A nominee trust can also be used to avoid passing title to real estate through a probate estate, which can be time-consuming and expensive. It can also be used to give particular interests in real estate away over time without having to file a deed each time a gift is made.

It should be emphasized that a nominee trust is not intended as a vehicle for shielding beneficiaries from liability to the trust’s creditors.  It does not confer any protection from creditors, transfer taxes, gift taxes or estate taxes

B. Taxation of Nominee Trusts

Under Massachusetts tax statutes, a trust which meets certain tests is non-taxable.  The tests basically are that the trust not maintain bank accounts, collect or receive rents, pay bills, maintain books or own assets as other than a nominee.  Any losses that a nominee trust incurs pass through to the beneficiaries, and any distribution of income is fully taxable to them. Following the direction of the beneficiary, a trustee of a nominee trust can execute a note or mortgage encumbering trust property, receive a tax bill or convey property it holds.  Under the Internal Revenue Code, it is doubtful that a nominee trust would be deemed a trust. 

Short Sales

A short sale of real estate occurs when the holder of a mortgage encumbering a property is willing to accept less money than it is owed in exchange for releasing the property from its mortgage.   Because a short sale is occurring does not mean a seller is in foreclosure. A short sale can result when a home is worth less than the balance of its loan.  Homeowners that are in jeopardy of foreclosure may attempt to negotiate a short sale in order to preserve their credit and limit their future financial responsibilities.

A short sale requires patience, understanding of the process and the willingness to consult qualified professionals. There are certain legal and tax ramifications which may change the timeline for negotiations and a closing date.

Lenders may be incentivized to consider short sales with homeowners because Massachusetts laws make foreclosures difficult. The foreclosure process can take more than ninety days and is often an expensive legal process. The bankruptcy court can allow a foreclosure sale to be overturned if the amount of the sale was less than the market value of the property. Therefore, when lenders in Massachusetts do agree to a short sale, they go to great lengths to publicize it to prospective Buyers and real estate agents, to assure that it will be successful.

A. The Offer

In order to prevent foreclosure, a Seller may be under a timeline to “sell short” and must have an offer from a Buyer that is approved by the Seller’s lender.

As a potential home Buyer for a short sale, you must provide evidence that you qualify to purchase the property. A lender will not approve a short sale with a Buyer without reasonable assurances that the Buyer will have sufficient funding to consummate the contract. If the Buyer plans to finance the purchase, a credit approval from a reputable lender should be presented. Or, if the Buyer plans to pay cash, a bank statement or letters of credit should be presented.

B. “Short Sale Ready”

Sellers selling short typically have a limited amount of time to obtain a qualified Buyer in order to avoid foreclosure. To make a property “short sale ready” in time, the Sellers must communicate with their lender(s) and provide the necessary paperwork. A Buyer would not be wise to pursue a property that is not “short sale ready.” The Buyer may get “locked in” for a long time and miss opportunities to buy other properties that come on the market.