Dual Income,No Kids (and one dog) seeking information or property inheritance

[bSweet]

age:42 and 47

desired retirement age: 50 and 55 (respectively)

assets: 28 years of living expenses as renters

employment status: both working full time

expenses: significantly lower than income

current location: mostly a dreamy state of mind but physically in Texas

ideal retirement location: in the mountains near a division 1 university… and an airport no more than 1 hour away

My Question: My in-laws have stated, upon their passing, they want to leave their home to both their son (my husband) and daughter. When this event occurs, if we inherit the property, how do we avoid being heavily taxed?

Thanks in advance,
bSweet

 

[SecondCor521]

Why do you think you would be heavily taxed?

Their property would receive a step-up in value to the date of death. So he would owe capital gains taxes if he held it a while and then sold it for more than that.

He'd probably owe half of the property taxes every year.

He'd have maintenance and upkeep costs.

If your in-laws are multi-millionaires, their estate might owe estate taxes. But in that scenario it's likely that the home value would just be included in their estate and contribute to their estate tax issue - the tax itself could be paid from other assets.

Probably the bigger issue is that a 50/50 ownership between two siblings typically doesn't work out long term. What he might want to do is consider some sort of buy-sell arrangement with his sister where he (or she) names a price and the other person can then buy or sell at that price.

Another option would be to have he or his sister take the house, and the other person take other assets to even things out. To do this, your husband and SIL may need to read the language in their parents' will and/or check with an attorney to make sure they could do something like that when the inheritance occurs. In principle the instructions of the will are supposed to be followed as much as possible.

 

[Bamaman]

Depending on the size of the in laws' estate, you most likely will not get hit with big inheritance taxes.

I inherited a lake house jointly with my sister, and she never used it. It's just 1 hour from us, and I grew up there.

Fortunately I had the cash to write my sister a check for her share, and she transferred ownership to me on a simple quit claim. No 1099 or attorney came into the deal.

The alternative would have been to sell the house and split the proceeds. And we didn't want to sell a great house in our family since 1945.

 

[OldShooter]

No tax worries, really. If there is estate tax (fed is unlikely) the estate pays it before assets are distributed. And in the house you get the basis step-up so no taxes there if you sell immediately.

Re dividing the property, we faced the same thing --three kids-- with the family lake home when our mother died. I was handling her affairs for her (at her request) so I drafted the will before handing it off to her attorney. Since DW and I had another lake place, the will specified that the lake home would go to my brother and sister, with me being made whole/equal division of total assets from the financial assets in the estate. I also specified in the will that the valuation of the property would be the county's most-current Estimated Market Value for property taxes. These are always a bit low, but pre-specifying the value eliminated the risk of warring appraisals and someone feeling that they had been short-changed. DW and I felt that avoiding acrimony in the family was more important than the little bit of money we left on the table.

 

[bSweet]

Why do you think you would be heavily taxed?

Their property would receive a step-up in value to the date of death. So he would owe capital gains taxes if he held it a while and then sold it for more than that.

He'd probably owe half of the property taxes every year.

He'd have maintenance and upkeep costs.

If your in-laws are multi-millionaires, their estate might owe estate taxes. But in that scenario it's likely that the home value would just be included in their estate and contribute to their estate tax issue - the tax itself could be paid from other assets.

Probably the bigger issue is that a 50/50 ownership between two siblings typically doesn't work out long term. What he might want to do is consider some sort of buy-sell arrangement with his sister where he (or she) names a price and the other person can then buy or sell at that price.

Another option would be to have he or his sister take the house, and the other person take other assets to even things out. To do this, your husband and SIL may need to read the language in their parents' will and/or check with an attorney to make sure they could do something like that when the inheritance occurs. In principle the instructions of the will are supposed to be followed as much as possible.

SecondCor521,
Thank you for the fantastic points and suggestions.

I have been really concerned about a possible 50/50 ownership but your suggestion of one assuming the house and the other receiving all other assets, gives us some room to be flexible while hopefully abiding by my in-laws wishes.

My in-laws are not multi-millionaires but the thought makes me smile.

 

[bSweet]

Depending on the size of the in laws' estate, you most likely will not get hit with big inheritance taxes.

I inherited a lake house jointly with my sister, and she never used it. It's just 1 hour from us, and I grew up there.

Fortunately I had the cash to write my sister a check for her share, and she transferred ownership to me on a simple quit claim. No 1099 or attorney came into the deal.

The alternative would have been to sell the house and split the proceeds. And we didn't want to sell a great house in our family since 1945.

Bamaman,

My DH has not expressed a deep desire to own the property but my SIL may want to keep it. A quit claim sounds like another great alternative.

 

[bSweet]

No tax worries, really. If there is estate tax (fed is unlikely) the estate pays it before assets are distributed. And in the house you get the basis step-up so no taxes there if you sell immediately.

Re dividing the property, we faced the same thing --three kids-- with the family lake home when our mother died. I was handling her affairs for her (at her request) so I drafted the will before handing it off to her attorney. Since DW and I had another lake place, the will specified that the lake home would go to my brother and sister, with me being made whole/equal division of total assets from the financial assets in the estate. I also specified in the will that the valuation of the property would be the county's most-current Estimated Market Value for property taxes. These are always a bit low, but pre-specifying the value eliminated the risk of warring appraisals and someone feeling that they had been short-changed. DW and I felt that avoiding acrimony in the family was more important than the little bit of money we left on the table.

OldShooter,
You are reading my true fear; a little bit of money can severely fracture family relationships. I really like the specification and fairness of the property valuation. Thank you!

 

[OldShooter]

... she transferred ownership to me on a simple quit claim. No 1099 or attorney came into the deal. ...

I've never heard of a 1099 in a property transaction, but generally I think amateur lawyering is unwise.

Mea culpa: I was executor of my mom's estate and had access to plenty of legal resources, but a few weeks ago I got a somewhat embarrassing email concerning my mother's estate, which closed 17 years ago. This involves transferring the family summer/lake home:

When you deeded from your mother's trust to Fred and Marilyn you did not file a certificate of trust and affidavit of trustee. those documents are necessary to convey marketable title from a trust. To avoid future issues with marketability of title I am attaching two documents for your notarized signature. Please sign, have notarized and return to me. If any questions just ask.
​

This is not a big deal, fortunately, because I know the attorney. But I think about what a mess it might have been if no one knew how to contact me or if I had died in the mean time. They probably would have had to go to court to clear the title.

So ... word to the wise I guess ... better to at least get professional review of any amateur lawyer's work.

 

[all4j]

Anyone unfamiliar with 1099 for real estate might want to check out 1099-S...

Largely echoing previous posts, I would suggest relationship issues are likely a much bigger item than taxes. Assuming house passes via a will, it will be handled in accordance with county/state law. Some places have estate tax, some inheritance tax, some neither, etc.

In general, I would suggest leaving as much leeway as possible depending upon the family dynamics. The previous suggestion on upfront evaluation is good & worked well in that case it sounds. However undoubtedly, it won't always work. The more upfront agreement the better, but just know that the main thing to rely on is that things will change & every eventuality can't be anticipated.

I would definitely avoid joint ownership to every extent practical. Contents of the house may have greater chance of friction. Realize that as parents age, the upkeep will be harder & may prompt need for some work before selling. In emotion of dealing with a loss, even upfront agreements may evaporate.

One other comment on family dynamics...if both kids let parents know they aren't interested in the house, the parents may have hurt feelings. So can even be dicey getting wills worded to everyone's preference.

Good luck...family is better off addressing now rather than later