Stephan Shipe
Welcome back to the Scholar Wealth Podcast. This week is all about homes and the planning questions that come with them. We begin with a listener preparing to buy a home held inside a trust. The seller bought at the post-pandemic peak and is coming out of pocket, and our listener wants to know what the trust ownership means for lenders, risk, and the negotiation. Then a family that has tried four budgets in two years and watched each one of them fall apart. They want to know how to build one when neither income nor expenses look steady year to year.

We close with a couple moving from New York to Palm Beach. They'll still be back in the Northeast three to four months a year, and they want to change residency cleanly. So let's go ahead and start with our first question.

We are currently in the process of relocating and considering purchasing a home that the current owners have placed in an Equity Trust Company, in what appears to be part of a defined benefit plan. The home was purchased by the prior owner at the peak of the post-pandemic market in the region, and the current listed price is six to seven percent less than what they paid for the house three years ago. We would likely be able to purchase the home with cash, coming from brokerage account savings planned for a housing upgrade and a HELOC on our current home. I've seen where some lenders may not lend in these instances, a home owned by a trust. And I'm curious about your thoughts on buying such a property, from both a logistics and risk standpoint as well as the perspective of buying from a seller who is likely out of pocket, and realizing placing the property in a trust may not have been a wise decision.

So lots of things to jump into here. We're going to do something a little different on this one. We're just going to break it down piece by piece, because it's well articulated here of what the issues are, but I don't want to lose anyone as we're going through it. So let's start from the top here.

All right, so we are looking at purchasing a home that the current owners have placed in Equity Trust Company, which appears to be part of a defined benefit plan. So this is the first potential red flag that exists. And it's not even the defined benefit plan. Equity Trust Company has a horrible reputation for being kind of a mess when it comes to dealing with transactions, right? They are established as a way, and where I typically see them show up is when you have some sort of alternative investment structure, typically real estate. And you'll see some of these self-directed IRAs where you have an account, and that person's looking to put the money in the account and then go invest in something that's not your traditional stocks and bonds. Real estate's a really big one, but riddled with fees, it's a mess. I think Equity Trust Company still has like $300 of my dollars from like 15 years ago that's still in there that I can't get out, because the cost to close the account would be $400 or something like that. It's a disaster. I've never seen anyone say this is a wonderful experience. So that worries me a little bit, especially when you're saying that that's combined with a defined benefit plan.

What I think might add to the confusion here is that Equity Trust Company does not mean that the only thing they're doing is trust. That's just the name. So the company's name is Equity Trust Company. It doesn't mean that the asset itself is a trust. The fact that it's in a defined benefit plan, you would think would make that easier. It actually makes it a little messier to understand what's going on there. So when we're talking about a defined benefit plan, generally, when you have real estate inside a defined benefit plan, you can't have a personal residence in there. So I'd be concerned a little bit about whether or not the seller has put their house in a defined benefit plan. And for those of you who are unfamiliar, that'd be a pension plan. So it'd be like owning your house in a pension, within a company that's called Equity Trust Company. So it's all a mess. Now, we'll get to whether or not that works for you here in a little bit, but I'm a little concerned about whether or not they actually own that.

Maybe they don't own the house as a primary residence, and this truly is a retirement plan, a defined benefit plan that owns a piece of real estate that now they're trying to get out of that pension plan because they're just trying to sell it. That does add a little bit of complexity to what you're trying to deal with. But to be honest, it's not really your problem too much. There's a little bit of this that's your problem, in that it's going to be a more complex situation. But the fact that the real estate is held by a pension isn't necessarily a problem for you, because you're a buyer and you have what's an arm's length transaction. You're able to go out and buy anything you want to buy. The fact that you're buying from a pension is just like buying from a corporation or buying from somebody personally. That takes a lot of the pressure off of you. As long as they're doing everything right on their side, what'll happen is their pension fund, just like if you had an IRA and that IRA owned a piece of real estate and you sold the real estate to somebody, the person you sold that real estate to, it doesn't matter to them who they bought it from, right? You're going into the situation where you're buying this piece of property from a defined benefit plan. The defined benefit plan is going to get the proceeds, and then they can do whatever they want inside the pension. They might go take that and invest it in stocks or bonds or another piece of real estate. So that in itself is not much of a problem in my mind, other than knowing who you're buying from.

The seller in this case is likely going to have a little bit of extra paperwork. There's going to be some different names and titles and everything rolling around. You're going to make sure that your attorney is familiar with this type of transaction, to make sure that titling is done correctly, make sure that proceeds are going in the right direction. You're not writing the check to an individual in this case, you're writing a check to a pension that is selling you the property. So little things like that are something we have to watch out for. But I do think that some of the questions that you're having about what the complexities would be about buying a piece of property from a trust may be alleviated by the fact that I don't actually think that it is a trust that's owning it, from what it sounds like. It sounds like it's a retirement plan that just happens to be a company called Equity Trust Company. So that makes things a little bit nicer.

Now let's go down to the next piece of this. It says the home was purchased by the prior owner at the peak of the post-pandemic market in the region, but the currently listed price is six to seven percent less than what they paid for the house three years ago. Completely irrelevant. What they paid for the house in the past is sunk cost. We don't worry about that whatsoever. Maybe they overpaid 40% for the house and now they're only 6% less than that. You're still overpaying by 34%. So we want to be careful on comparisons of what somebody else decided that property was worth. What you want to worry about now, pure comps. What do the comps in this area say that house is worth? And you go directly from there.

I'm going to argue, though, that with all of this other mess of all this stuff going on, you are in a perfect position for negotiation, right? You come in and say you've got brokerage account savings, you've got the HELOC that you can get into. I don't think you're going to run into the issues you talked about. Some lenders may not lend in those instances for a home owned by a trust. A lot of the times that I've seen that, the issue is more that the bank will not lend to a trust to buy a home. In your case, I can't see a reason, maybe I'm wrong, where a bank wouldn't give you money to go buy a house in an arm's length transaction. So not as concerned, but kind of irrelevant because you have the cash and the HELOC. You could go in there and buy it with cash, use that to your negotiating advantage. And then once the house is in your name, then if you want to go take out a mortgage on it, refinance, do something along those lines, then go do that outside of it. And then the bank doesn't have to worry about whether or not it was a trust, pension plan, or whatever else. That's already been taken care of. It's in your name at this point.

So that's where, when we're talking about due diligence, it's not just how much is the house worth, what the inspections are like, all of those, but I'd be bringing in the attorney to make sure that everything's going to be structured all right. They're familiar with it and go forward with it that way. But I'd use that to your advantage. You're a cash buyer coming into a complex situation, in a situation which sounds like the owner is motivated to sell. That is a perfect situation for a good deal. I mean, that is the dream situation, but it's only the dream if you take advantage of it. It's a risk-reward situation. The risk is the complexity that you're dealing with, and the fact that everyone else is going to look at this and say, there's no way I want to mess around with that. You can come in and say, I'm happy to mess around with it, I've got cash to do it. So if you want me to be the buyer, I'm going to come in, but with a significant haircut on that price to compensate you for the hassle of having to take this problem off their hands. That's the way that I would look at dealing with this and helping them unwind this position. But overall, I don't think it's too different from a regular transaction. You just need to make sure you've got the right team in place to make sure that you're not only not going to get yourself into trouble, but also take advantage of the situation of you having the financial ability to negotiate hard into this.

So let's go on to our next question here.

Our family has three homes, our primary in Nashville, a lake house, and a condo in Park City the kids use during school breaks. And we've given up on budgeting at least four times in the past two years. Our carrying costs swing so much month to month that every spreadsheet or app we try falls apart within a quarter. My income is lumpy too, since I'm a consulting firm partner paid quarterly. Every financial plan we've tried starts with a budget, but how do we even make one?

Super common situation. Especially as you start to increase in income and assets. And I don't mean that necessarily by financial assets, assets and stuff, right? You're talking about homes, cars, vacations, renovations, all of that. No one can budget that, because you don't go and budget, we're going to put, you know, ten thousand dollars a month into an account for a vacation. And at first that sounds great. That's how basic monthly budgets are done. It's like, well, you have your electricity bill, you have your water bill, and you have your mortgage, and you have all of this. Let's add all that up. And then we do take that one vacation a year and it's going to cost us 12 grand. So let's go put a thousand dollars a month into that. That sounds great when you have one of those. But what ends up happening is you hit what you're dealing with, where you've got like 50 of these things going on. And it's not something that's the same every single year.

You can't go, and this is exactly what you're describing, you can't go and say, well, we're going to save for this one vacation this year. It's like, well, there's a vacation every year. There's multiple vacations every year, and they vary. And you can't say, well, we're going to put X amount away for travel to one of the houses, or carrying costs in the houses, because it varies. Some years you're going to use the condo more. Other years you're going to use the lake house more. You go buy a boat for the lake house, and then one year it spikes and the next year it's low. How do you put that into a monthly budgeting app? It becomes really difficult, because January may be, you know, five times whatever March is, because of some ski trips. And June may be 10 times whatever May was, because you bought a boat. So you're seeing these spikes all over the place.

So what I would encourage you to do is take a step back from it. And I want you to start tracking everything annually, right? You look at this on an annual basis. Now, that's assuming you have some financial wherewithal of this, and you're not going to go blow everything in January. But to be honest, you haven't had a budget anyways, and you've been making it. So I can't imagine that you not having a budget for 10 months is going to be a problem. I would look at this on an annual basis. Go look at the past five years of spending. The nice thing about these budgeting apps and everything is usually, if you hook them up, you can aggregate, right? It'll just say, you know, I put in a credit card, it tells me what all my expenses were over the past five years. I put in a bank account, it tells me what my expenses were. Most banks will do this as well and give you some printout of your expenses.

If you don't even want to go that granular, look at inflows and outflows from your checking account. And if you use a brokerage account for spending, you can include that there. But at least the checking. Go into the checking, go into Excel, sort everything high to low for all your transactions for a year, and then add up everything that's a plus and add up everything that's a minus. And then look at that and determine how much are you actually spending out of that account. And then look at that over the past few years. That's going to be the most realistic number you can get. Because we see this all the time where somebody will come in to me and we're talking to them, a client of mine will say, well, I don't know what I spend. And they feel bad about it. And they look and say, well, that's crazy, I should know how much I spend, I'm doing well. It's not crazy at all. It's more common that you end up in the situation that you're in, where you're doing well, there's money there, but you just don't know which fund it's going in, right? Is this going in the vacation fund? Is it going into the Park City fund? Is it going to the lake house fund? Is it going to the Nashville fund? It all just mixed together.

So let it mix together. Pull it all together and say, this is how much we spend every year. And then look at those over the past few years, and you'll likely see that that lumpiness starts to smooth out. And there might be a year where there was a big expense, and there you might have bought a piece of real estate, done a major renovation, something along those lines, completely fine. But it's a lot easier to go in and say, well, 2023 was when we did the renovation. So if we pull the renovation out, now we start to see a smoother line. And I'd much rather use that number to say, this is how much we spend every year, and then add to it renovations, add to it real estate purchases, add to it unexpected travel, because you're always going to be traveling. It's just going to be a matter of what are those big expenses that are not normal for your life. So you're focused on that normal, and then anything that's truly a big jump from it.

Other than that, I wouldn't worry too much in there about how much are you spending on the electric bill versus how much are you spending eating out versus fuel for cars. That's not likely going to be too helpful for your overall spending. Because my guess is that if we were sitting down together looking at all this, we would look at it and it's not going to be how many times you went out to a restaurant to eat. It's going to be, should we do a $500,000 or million-dollar renovation? That's going to be the big thing that causes that spike to go up or down. And you just have to take a step back and realize that that's really what's going to make the numbers change. It's not going to be like how many times you hit Starbucks up throughout the week.

All righty. And our final question from today. We're moving from New York to Palm Beach next spring, after my husband's firm agreed to let him work out of their Florida office. You should renegotiate, try to start that in January, the weather would be nicer. And his compensation last year was around two point one million, mostly bonus, and we expect similar going forward. His mother's in a memory care facility ten minutes from our current Scarsdale home. We'd likely spend three to four months a year back in the Northeast between her place and work obligations. It seems like New York residency audits assume you're trying to game the system, rather than someone with legitimate reasons to be back in the state. Any steps that you recommend?

Well, you completed step one, which is moving out of New York. Right. That's the big one from a tax perspective, and for everything else that comes of this, for a lot of these reasons. You are the exact person that New York does not want to leave. Two point one million dollars, mostly bonus, right? You're talking about, I mean, in this case, hundreds of thousands of dollars just in New York state taxes. You better believe that you are on their list for a residency audit when they come through this. They'd be crazy not to. I would be personally disappointed in New York if they looked at you, saw that you left the state, and said, we should really check and make sure that they really left. Right? Because they need all the income they can get.

So the way that we do this, though, is we need to make sure that you're doing this legitimately. And it sounds like you are, right? And you are absolutely right that they're going to go in with this assumption that somebody's not doing it legitimately, because the stakes are so large. A lot of people are willing to gamble on the residency, because you're talking about hundreds of thousands of dollars in income. So that typically falls into two areas. You have statutory residency and domicile. Now, the first one's the easy one. When you're talking about residency from 183 days, and you have 183 days in New York, right, it's going to be New York residency from that perspective. You need both of them, though. In other words, if you say, well, it's only three months, that's only 90 days, we're not going to hit the 183 days, so we're fine.

The next piece of this is domicile. That's the one where it gets really subjective. And that's the one we need to build the book on, of saying, we truly are Floridians now, we're no longer New Yorkers. And they're going to ask you to prove that. And it's going to be on you to prove that. And it's not as difficult to prove if you truly are Floridians now. They're going to look at things like where you live and any business you're doing down there, how much time you're spending. Even down to, like, where your friends are. I mean, I've heard stories of Massachusetts being like this too, where they've looked at social media posts and seen where you're spending the weekends, who you're hanging out with, who your close friends are. Right? It's not just, I have an electricity bill in my name. They want to know all the stuff. They want to know, are you truly living down there? Because if you're truly living down there, then they can't come after you. But you can defend yourself in an audit, which is going to be the biggest factor that comes in.

So if you're truly cutting ties, what I always recommend is you're talking to your CPA about this, trying to figure out what the risk is, but it's not worth playing around with. The extreme cases are extreme, usually. It's the ones where somebody moves down to Florida, buys a small condo, keeps a huge house up in New York, and then all of their social events are still in New York, their car's in New York, all of this is still in New York, and they're trying to convince the state that they really are Florida residents. And that's a lot harder. You need a lot more than that. But it sounds like in your case, you're doing all the things. If you're doing all the things that are normally going to move you down to Florida, I don't think you have anything to worry about. You're going to be in a situation where you are going to be able to justify that you no longer live in New York, because you no longer live in New York. Right? Your friends are there, you're voting down in Florida, you're registering your car, right? You have bills down there, you have logs of where you're going to work. I mean, your husband's already down there working from that office. It's going to be easy to prove.

So I wouldn't let this be something that's extremely worrying you. And this comes to the case with most of the time when it comes to taxes and audits and everything like that. If you're doing everything by the book anyways, right, I don't know that you have much to worry about. It's going to be hard for them to come after you and say, no, you're really a New York resident, if you've given up your house in New York, you've moved down to Florida, you have your house there, your social life is there, your income is there, all your ties to that area are Florida, and you're vacationing up in New York, even better. If you wanted to go one step further and truly make it easier, then rent somewhere in New York for those three months and have the house in Florida, and truly build up that case where there are no ties to New York anymore. And to be honest, with the amount of income that you're earning, that's probably a good hedge. You're talking about hundreds of thousands of dollars of income, or a hundred thousand dollars of taxes every year just to the state. Go ahead and do the things that make you a Florida resident. Live it, embrace it, live the Florida life, and not have to worry about it anymore.

All right, everybody. That's our show. Thanks for listening, and we'll see you next week.