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Having estate conversations now makes everything easier down the line

Having estate conversations now makes everything easier down the line

Q: First off, thank you for all the wonderful information on Ilyce’s YouTube channel. The videos are very well made and informative. I am trying to gather some initial information about a situation my family will be dealing with shortly and was hoping that you could shed some light on things for me.

Here’s the situation: My mother is the sole owner of a property, located in New York, that she intends to pass down equally to her two children. One of us would like to become the new owner of the property and live in the residence. The other would just like their half of the equity of the property and then would walk away from the situation.

All parties involved get along, trust the other and are open to whatever solution makes the most fiscal sense for everyone. What are some options we should be exploring? Any considerations we should be aware of as we start this process?

Any assistance would be greatly appreciated!

A: It’s nice to have an opportunity to weigh in before decisions are made, someone dies, and feelings get hurt. Unfortunately, too often there is little planning done in these decisions, and once someone has passed, often the emotional reverberations overtake logic and reason.

We’re going to assume a few things: Your mother owns the property without a mortgage and whatever she owns in life beyond the New York residence will also be equally divided between her two children. These other assets might include stocks, bonds, jewelry, vehicles, artwork, collectibles and even other properties. Maybe she even owns some bitcoin.

When she dies, we assume you will both be named the executors of the estate. Once you have been given power over the estate, you will have to value all of the assets in the estate. You’ll need to do this for the estate tax return you’ll be filing, but it’s also helpful in figuring out how to divide up the assets fairly.

Once you have a sense of how much each asset is worth, you and your sibling can decide how to apportion the assets. There are a number of ways to divide the estate without literally dividing the house (as in the movie “War of the Roses”).

First, if the property is worth $500,000 and all of your mother’s other assets are worth $500,000, and neither of you cares who gets what, then one person gets the house and the other person gets everything else.

Let’s say that the house is your mother’s only asset and there’s nothing else of value in the estate. If that’s the case, then the sibling who wants to stay in the property can take the value of the property, subtract the cost of paying some sort of commission to the mythical real estate agent, and pay the other sibling half of the value of the property in cash.

If the sibling doesn’t have enough cash on hand, a cash out refinance on the property should provide enough liquidity. And, if the sibling can’t qualify for a large enough mortgage, both siblings could own the property as tenants in common, but this situation can get complicated. Once both of the siblings own the property, the one living in the home will have to make periodic payments to the other to buy that sibling out.

The siblings can establish a payment plan or an installment contract to buy out the other sibling. But you’ll want something in writing. We’d suggest you talk to a real estate attorney to set up some documentation.

You have to be careful about how you set this up. If you don’t do it correctly, you could end up in a situation where the sibling receiving money might have to pay taxes on that money. The idea is that each sibling would get one half of the home or the equivalent money and avoid paying taxes on the inheritance.

The two of you should sit down and discuss your options. Have a conversation around what happens in the worst case situation, where perhaps the sibling who gets the house dies unexpectedly, without owning it entirely yet, but the sibling's spouse or partner and/or children want to stay in the property. Make sure you cover all of your bases in the agreement and then both of you should sign that document.

Having these conversations now makes everything easier down the line. And, if circumstances change by then, you’ll have a framework that preserves the lines of trust and communication. Good luck. We hope your mother lives a long and happy life.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)

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