How to keep inheritance fair?

April 6, 2007 2:02 PM

Please help me make a proposal to my family about the fate of my parents’ home that is equitable and reasonable and doesn’t make me seem like a greedy jerkface.

My parents own a (kind of junky) condo in a very expensive town. They paid an incredibly low price for it, let’s say $150,000. Its market value right now, with no improvements, is about $300,000. With improvements it could sell for maybe $400,000.

This condo is the only asset my parents have, and makes up the entirety of their “estate.” No one wants it to leave the family in the foreseeable future.

My folks are moving to Florida and are considering selling the condo to my brother (who would live there) for something less than market value, and using that money to buy a place in FL. I cannot afford to “go in” with my brother to purchase it with him. It would be 100% his.

My interpretation of this is that if this happens, I am out any inheritance I might have had, and any possible profit I could have made on the place if my brother and I were co-owners and sold it at some point.

So, my question is this: what sort of compromise could I propose to my family? How could there be a share between the 3 parties that gives my parents some $ to move, gives my brother a place to live and some equity, keeps the home in the family, and doesn’t leave me totally out in the cold? Is this impossible?

Thanks, all.

posted by tristeza to work & money (24 comments total)

Have the property appraised. Call the appraised value X. Your brother then goes and gets traditional financing for a property valued at X. Your parents skim the required amount of money from the sale of the house. Call this value Y. Then you and your brother each receive (X-Y)/2. Your brother can choose to roll this money into the house or do with it as he pleases.

Perhaps your brother has no downpayment. If your parents have free cash, then they can gift him Z before the sale of the house. If so, then after the house is sold you would receive (X-Y+Z)/2 and he would receive (X-Y-Z)/2.
posted by crazycanuck at 2:12 PM on April 6, 2007

MY gut reaction is to point out that it is impossible for you to broach this subject without coming off as a "greedy jerk face". The idea that your are somehow entitled to some specific portion of your parent's worldly possessions while they are still alive and well is off putting. They are free to do whatever they like with their possessions, and you are not entitled to anything other than what they choose to give at the time their wills are executed.
posted by cosmicbandito at 2:14 PM on April 6, 2007

Why step up the basis now by selling it in the first place? If the issue is that your brother wants to live there, they can lease it to him at below market which would likely be tax advantaged for all of you (well, after they die anyway). Do they need the cash from the sale to your brother for some reason? Is there a reason for them to buy in FLA right now, in this market? Why not rent down there with the money your bother pays to lease their place. That seems fair to me. IANA Tax Lawyer, Estate Planner or Accountant, but it seems like trouble is being made here that doesn't have to be made.
posted by The Bellman at 2:14 PM on April 6, 2007

Bellman, great questions, those help:

1) They need the cash to buy their new place.
2) They don't HAVE to move now, but they're going to.
2) Where they're moving they cannot rent, there are only single family homes for purchase.

cosmicbandito, suffice it to say that my parents want this to be 100% equitable between their kids, they just don't know how to do it.
posted by tristeza at 2:21 PM on April 6, 2007

Wait, why wouldn't you inherit their new place in Florida? I am confused.
posted by MeetMegan at 2:25 PM on April 6, 2007

MeetMegan - I am assuming that that place would be sold to someone else and proceeds split 50/50 (assumes neither of us wants it).
posted by tristeza at 2:27 PM on April 6, 2007

And that would be your inheritance, I am confused as to what your issue is...? Is it that your brother's getting the benefit of the sale of the condo at a below-market price? Figure out what the real price is, and take that portion out of his 50/50 split when your parents actually die.
posted by MeetMegan at 2:29 PM on April 6, 2007

Am I missing something ? What if they sold the place to a stranger? They are buying a new place....THAT is the inheritance. Your brother gets a deal, and maybe in the will, you will get a bigger portion on the Florida house.
posted by lobstah at 2:31 PM on April 6, 2007

Yeah, what MeetMegan & lobstah said -- your brother could consider whatever deal he's getting as an early inheritance and then the remaining 2 parties (You said 3 parties total, right?) split the estate between you later.

The assumption is that you'd make out equally well in this deal. But if your parents gave your brother a really, really good deal on the condo, he could end up ahead.

I don't think this is the least bit mercenary of you, tristeza. Division of estates can get ugly fast and I think it makes good sense to sort it out beforehand as much as possible.
posted by contessa at 2:35 PM on April 6, 2007

If they sold the place to a stranger, they'd probably have to use a realtor, who would then take a commission.

Why not just have them deduct 6% from the home's appraised value and sell it to your brother at that price. That way, he still gets a deal, and they get the same amount of money they'd get if they used a realtor and sold it to a stranger.
posted by Ostara at 2:42 PM on April 6, 2007

I'll lay a little math on this to illustrate it, if it'll help:

Let's say your parents sell condo to your brother for $25k below fair market value. Effectively gifting him with that amount of money.

Then they put this toward a new house. At some point in the future both have died (sorry!) and heirs dissolve the estate and split it among them - assuming those are your parents' wishes.

If the value of the estate was $65,000, you would add in your brother's early inheritance of $25k making the full "value" $90k. Split three ways, each party would get $30k. Since your brother already "got" $25k, he'd only get $5k.

It could be less, though. Let's say the value of the estate is $35k. Adding in your brother's $25k and split three ways, theoretically each of you would be entitled to $20k. But there's really only $35k to divide up, and if your brother is like most people he's not going to offer to throw $5k of his own money to even up the pot for the two of you remaining heirs. So, you'd just have to suck it up, and tell your brother he already got his, and split $35k in half between the two who didn't get the sweetheart condo deal.
posted by contessa at 2:45 PM on April 6, 2007

Oh, one other thing. You could ask your parents that the executor of their estate be somebody other than your brother. It's pretty typical that if the executor is also an heir they get their portion of the estate plus some extra (10% is a normal figure) for dealing with all the executor-ing.
posted by contessa at 2:49 PM on April 6, 2007

Argh, I swear, last thing: whatever you all agree too, make sure it is written in the will.
posted by contessa at 2:50 PM on April 6, 2007

crazycanuck nailed it with the first answer.

I would add, though, that they might consider taking your portion of that {the (X-Y)/2} and stick it in an interest-bearing fund of some sort, payable once they've passed on.
posted by Alt F4 at 2:51 PM on April 6, 2007

(and contessa nailed it, again, in the posts just above my last post)
posted by Alt F4 at 2:53 PM on April 6, 2007

For the reasons set out above this may well be a bad idea. Talk to a tax professional, but selling the house within the family will almost certainly be less tax advantageous than leaving ownership unchanged and letting the basis step up when your parents die. It may not make a difference (there's a fairly large capital gains tax exemption if they have lived there for a few years, at least on the Federal tax side) but there are better ways to do this.

Your parents need the cash represented by their ownership of the house to buy the place in Florida, but that doesn't mean they have to sell the house. If they own the house outright, for example, one way to turn that equity into cash is to take out a mortgage and use the money to purchase the new place, letting your brother rent the old place and using the rent money to make the mortgage payments (plus a bit more, probably). Details will matter a lot in a transaction like this -- how much leverage are your parents comfortable with, how much income do they have, will the tax credit from the mortgage payments be useful to them, etc. But there are better ways to do this than selling the house within the family.

The problem is that a sale to your bother generates cash which will eventually be part of an estate, half of which will go back to your brother. Taxes will be paid on every part of that transaction including (unless your parents happen to die in 2009) an inheritance tax. The scheme you're describing amounts to a scheme to give the Federal and State governments as much of your brother's money as possible, which is insane. Talk to a tax professional: this isn't about you being greedy, it's about all of you being rational.
posted by The Bellman at 2:54 PM on April 6, 2007

Your brother (whether he knows or not) is being a bit opportunistic. The reason I say this (and I'm not trying to be offensive, but that's just they way he's coming off in the story you've told us) is because if you (and he) know that the house is worth X without improvement and Y with improvement and he'll pay less than X to get said house, he's basically screwing his parents over (and obviously screwing you in a less direct manner, since everyone knows that at THE end, all children get an equal share).

There are a few options available, but I don't see them as being completely viable:
1) Convince your parents that housing prices are tumbling in Florida (which they are) and that in a year, they'll pay much less for the same house than they would now. That'll buy you time to pay, from your own pocket, to renovate their existing house with the intention of selling it to a private owner and split the additional proceeds with your parents, who can then, if they choose, gift it to your brother as a down payment for another place. This way, you have your parents' best interests at heart in making them additional money and you end up getting paid for your diligence.
2) Convince your brother than he's not being equitable.
3) Live in the house with your brother.
4) Suck it up. It's not your money to divy up; if your parents favor your brother, that sucks, but that's their call to make.
posted by SeizeTheDay at 2:57 PM on April 6, 2007

This doesn't seem that hard to me, but I am not a financial planner. Let's assume that the place is worth $300K.

Say your brother takes out a loan for $200K and hands that to your parents. This is a 2/3 interest in the property.

The remaining 1/3 gets split 3 ways, with you and your other sibling retaining an ownership share of the condo. You retain a 1/9 share of the condo, your other sibling retains a 1/9 share, and the brother who put $200,000 into the condo gets a 7/9 share. 1/9 might not be a lot, but then you're not putting down 200 large. Rejigger the proportions as needed for other values your brother might pay your folks.

Shouldn't be that hard to hire a lawyer to write up the appropriate paperwork and deal with the gift-tax stuff. Your parents will almost certainly need to file gift tax paperwork, but they also almost certainly won't have to pay any gift tax. You'll also need to deal with decision-making about what happens to the condo -- decorating and renovating rooms and so on.
posted by ROU_Xenophobe at 3:04 PM on April 6, 2007

Taxes will be paid on every part of that transaction including (unless your parents happen to die in 2009) an inheritance tax.

For a $400,000 condo? (Federal) inheritance taxes don't kick in until well above that.
posted by ROU_Xenophobe at 3:07 PM on April 6, 2007

Fix up the place. Sell it for the full market value. Parents keep the amount they were going to sell it to your brother for, they pay for the renovations, and give each of you 1/2 of whatever is left over, which should be enough for both of you to put a downpayment on your own place. You both get money, they get money, the place is sold, and you both get your own place out of it.
posted by blue_beetle at 3:09 PM on April 6, 2007

Six step solution:

1. Parents move out of Condo A, but retain ownership.

2. Brother moves into Condo A.

3. Parents buy Condo B.

4. Brother pays monthly payment on Condo B for parents, in exchange for not paying anything for Condo A. (This is just considered a rent payment for his housing.)

5. Parents move into Heaven.

6. Siblings can sell both properties and split the funds, divide up the properties, etc.
posted by NotMyselfRightNow at 3:33 PM on April 6, 2007

You guys have no idea how helpful this is. You've given me a ton of great ideas and some new perspectives with which to approach my folks. I'll come back and do best answers once I process all of this!
posted by tristeza at 6:56 PM on April 6, 2007

[a few commetns removed. please take metadiscussions about how different families deal with inheritance to metatalk or email.]
posted by jessamyn at 6:59 PM on April 7, 2007

Well, I talked to the family today, and their plan (my folks and brother [I wasn't clear before, it's just me and bro, no 3rd sib]) is:

- sell condo to brother for about $100K under market
- brother makes improvements
- brother sells condo in 5 or so years
- parents and brother split profit from sale in 5 years

I was offered the option of putting a little $ towards the down payment, then figuring out w/brother what percentage of the profit that entitles me to when it sells. I'd have to get a home equity loan to even give Bro $1000 right now. Might be worth it.

The thing my folks don't get, I think, is that they're literally giving Bro $100K, and they are in effect OUT $100K, even if they profit from the sale. Oh well, at least I stressed that they need a goddamned lawyer, not just to half-ass it.

I know a lot of you think I'm being a total mercenary, but what I obvs didn't make clear at the outset is that my folks WANT to be fair to the 2 kids, and equitable, but they just don't know what they're doing and don't, I think, see that this benefits only one of us. I'm good with that now - he's a good kid and has worked hard in his life and dedicates his life to helping people (he served in the Air Force and now he's a firefighter) and really deserves a leg up. I already own my home, I'm fine.

I really appreciate the help here, god bless ya.
posted by tristeza at 7:56 PM on April 8, 2007