Financial Q&A: Postbankruptcy mortgage, but stuck at a high rate

Submit your questions to Steve at: money.csmonitor.com.

from the December 8, 2008 edition

Q: My husband and I purchased our home in 2005. We have an adjustable-rate mortgage. We later filed for Chapter 13 bankruptcy to keep from losing our home. We have been able to keep up with the payments since filing. My question is: Are we going to receive any relief, or are we pretty much stuck with the high adjustable rate?

D.M., Louisville, Ky.

A: Barry Taylor, a certified financial planner in San Francisco, believes you most will have to live with the terms of the agreement. He recommends that you talk with a bankruptcy attorney; maybe the one that handled your original case.

Meanwhile, have you contacted the mortgage company with your concerns? With the whole subprime mortgage mess, they're busy with people who are behind on payments, Mr. Taylor says. But most lenders have loan workout departments that try to work with people to find solutions for people having problems.

Q: I'm making a house loan to my child. Should this be in the trust? Should IRA funds be in the name of the trust? Would it be OK to just name the trust as the beneficiary for mutual funds? A CD is not in the trust because FDIC regulations seemed unclear whether the trust would be considered a single entity, allowing only $250,000 coverage; if my two children are named as beneficiaries, coverage goes up. Would probate be required for the CD?

C.D., Long Beach, Calif.

A: A trust is permitted to hold notes or evidence of indebtedness, says Karen Kinney, vice president of trust administration with Bryn Mawr Trust Co. In fact, she says, it would be preferable for the trust, rather than you, to hold the note, because the receivable (like other assets held by the trust) would then be an asset not subject to probate. If you own it in your name, the receivable would be subject to the probate process.

You shouldn't bother re-titling your IRA in the name of your revocable trust, adds Ms. Kinney, because it isn't part of your probate estate. When you die, the IRA will pass directly to whomever you name a beneficiary. You can name individuals if you wish, but naming your revocable trust as beneficiary is a good way both to avoid probate and provide for family members (such as young adults) who should not receive access to funds all at once.

As for FDIC coverage, funds deposited into an account owned by a revocable living trust may qualify for more insurance coverage than an account owned by an individual. These accounts may be insured up to $250,000 for each "qualifying beneficiary." Qualifying beneficiaries include parents, children, grandchildren, and siblings.

So if you title the CD in the name of your revocable trust, which passes on your death to your two children, you'll have $750,000 of FDIC insurance on the CD account. Re-titling the CD in the name of your revocable trust is therefore a good idea – not only to avoid probate but because the insurance coverage is higher.