“The lawyer insists this is normal. Is this normal?” (The subject of the photo is the model.) – Getty Images/iStockphoto
We are setting up a trust and own three homes.
Home 1: We are halfway through our 15-year mortgage. Our adult children rent a house. After the loan is paid off, or after we pass away, we want to give the house to them because they paid the mortgage. (Gifts may be delayed to delay base upgrades.)
House 2: Has a 15-year mortgage with about 12 years remaining. The money was a cash out refinance (on a previously paid off home) and was used to purchase house #3. We live in this home.
House #3: Our adult children rent the house. After the mortgage on house 2 is paid off, or after we pass away, we want to give this house to them since they paid the mortgage. We hope to do something similar for our third offspring in the future, but it’s not settled yet.
Our attorneys wanted a very standard provision in what we understood to be a trust, where all the assets were added up and then divided into three parts (because we had descendants), and each descendant could use some of the money they inherited to “purchase” the home they currently live in (and pay the mortgage) at market interest rates.
For example, Child #1 may have to use inherited funds to “purchase” his own home for $500,000 (appreciation) minus $25,000 (balance due). We’re very against this because it’s absolutely crazy to us.
They’ve paid off their mortgage. There is no point in asking them to “pay” again. But lawyers insist this is normal. Is it normal? (Even if this were normal, we wouldn’t agree.) What would you do in this situation?
Don’t miss: “I’m trying desperately to do the right thing for everyone”: I will give my son $250,000 and my daughter 50% of the rent we own together. Is this fair?
Note that standard estate law does not automatically treat the rent as a mortgage on the home they eventually own. – MarketWatch Illustration
You’ve already made up your mind, so this response may fall on deaf ears.
Three issues: (1.) Giving away the homes could create tax problems down the road if your children want to sell them. (2.) Establishing a trust will benefit your children who are not yet housed. (3.) If your children’s homes have different fair market values ​​when you and/or your wife die, your children may end up with unequal estates if they ignore their attorney’s advice.
Note that standard estate law does not automatically treat the rent as a mortgage on the home they will eventually own unless you explicitly craft your estate plan to take this into account. Write it down: Think of your child’s payments as buying equity, or allowing them to acquire rights in the home, or establishing a trust to pay them off when they die.
Your attorney’s advice is pretty standard, but that doesn’t mean it’s everywhere. Estate planners will often set up trusts that allow one child to receive a specific property outright, treat mortgage payments or rent as a form of repayment of the loan/ownership of the asset, delay the transfer of ownership until the mortgage is paid off, in addition to using promissory notes, private annuities, and/or life estates with conditions tied to time (e.g., your death) or conduct (if there is a substance abuse problem).
If you hand these homes over to your children before you and your husband die, they will take your cost basis instead of increasing it to current market value. If, for simplicity’s sake, each home was purchased for exactly $500,000, and the respective homes were sold for $1,000,000, their capital gains would be based on the $500,000, not the $900,000 value at your death.
Fortunately, if they lived there for at least two of the five years before the sale, they may qualify for a capital gains tax exemption of up to $250,000 (single) or $500,000 (married couple). On the other hand, if they don’t use it as their primary residence, the local tax authorities will also reassess the property at its current market value, meaning they will face higher property taxes depending on where they live.
There is essentially no “normal”. Everyone has their own estate plan that suits their needs, wealth and personal relationship with their children (in this case, future generations). But it does seem like sound judgment to put your assets into a trust and specify that the fair market value of those properties should be deducted from your children’s final inheritance. This way, you can help ensure that your assets are divided fairly and equitably.
Some questions: Is there any reason you would be happy for a child to inherit a more valuable estate? Why is it important that they own these homes during your lifetime? Do you trust your lawyer? Would you be willing to find a new attorney if you lacked trust in this attorney and did not respect his opinion? There is a reason why someone hires legal counsel for help. Sometimes, they really do know best.
If you wish, you can ignore basic tax and legal advice from attorneys and accountants. Self-will is a powerful motivator and it may have served you well so far. But it’s probably unwise to classify it as “crazy” just because you disagree with your attorney’s advice. This is based on his knowledge of tax law and solid feedback on your personal case. Your attorney has his opinion; another attorney may have a different opinion.
Just know that if you do ignore tax advice, it could cost your children more in the long run.
Related: My mother is selling my late father’s multi-million dollar California real estate portfolio – do I have to sit back and watch?
:
“Where are we vulnerable?” My husband and I are both in our 50s. Our $450,000 mortgage is paid off. We have a $500,000 IRA.
My 81 year old mother-in-law is guilty of making us pay for her “bucket list” trip to Italy. Do we say no?
‘It’s a dangerous choice’: I got a part-time job. Should I apply for Social Security at age 67 or 70?
