Loaning money to adult child resulting from a divorce

[ddk70]

Didn’t think this would be a post I’d be making in retirement. However we are here.

We have an 45 yr adult daughter married for 12 years. Married to initially what she thought was the man of her dreams. Turned out different. He asked her for a divorce within the last month, he is 52, second marriage (first one lasted 7 yr).

Daughter and he bought their 2nd home in Round Rock Texas during COVID financing at 3.5% rate. A cherry for sure. Paid $350K for the home in 2020. He wanted to initially buy her out and take over ownership asap. We said no way, get an attorney and have since signed one on. Then he did also, initially he thought they could work out the details through mediation. They’re here at this point because of money he’s very controlling. He works and probably could sustain the current value of the house at 425k. Mortgage is a 30 year mortgage current balance 116,000., monthly payment with taxes $1342

After meeting with the attorneys this week, she was told without supplying all the concrete detailed numbers napkin math is payout is probably about 150 K / 155 K whoever buys whoever out.

Current value
425 house value
(116) current mortgage
309/2=154.5


Purchase Price
306
(171) down payment
135 mortgage 30 year

$1341. Monthly payment


Daughter believes he may have 100k sitting in cash on sideline and could afford to buy her out. She does not have the liquidity.

She bought her initial piece of real estate in 2007 at age 27 and got caught in the Great Recession, held on for several years and then taking a loss of 20 K on the sale after she got married. She’s worked all her life and she’s self-employed graphic designer. Waiting of SSI numbers from her to me. Our FP has noted she may not qualify for an additional mortgage. Personally she is capable of running the house by herself physically, we’re totally confident there. That’s not the question.


Options

#1. my husband and I are considering loaning her the money to take ownership of the home.


#2 she takes her payout from the money, proceeds rents for a while until she figures out which direction she wants to go, takes some money and invest it in her IRA. It’s been confirmed by attorneys. She can make the transfer as marital transfer of assets. She could split the money between half and cash or CDs the other as IRA contributionIt allows for her to bump up her IRA, which she has been lagging behind here on the other hand, he never did and never contributed to assist in funding her IRA.


#3 loaning her the money options here. My financial planner has suggested, not sure if she would qualify with her current income for a retail mortgage she could assume paying the current mortgage.

Recently we met with our new accountant. He confirmed we could loan her the money however it could not be at a 0% loan. The government frowns on this and if it’s a mortgage style loan, we would have to charge a standard rate which is less than the current going retail rates.

Now he is the rub we have about 150k sitting in cash as our cash reserves the rest of our assests are sitting in our IRAs have about 1.6 M in retirement funds. We own home free and clear in Florida valued around 500 K.. we live on our Social Security income, which equates to over 5000 a month as well additional cash from a house sale up north before we really start to hit RMD‘s.( 2027 for me) ( 2030 DH) I’m 71 hubby is 68. Oh annuity kicks in in 2027also, additional 12K per yr.

Looking for creative ways to get the loan to daughter without her losing the original mortgage of 3.5% and without refinancing the entire loan amount. We only have two children, and son is married with one child effective 2023. All good on that front financially.

She wants to remain in Texas. Our family is all over the country now she’s built roots there since she arrived in 2015. My health has been tested this last year with a cancer scare recovery completely and husband is struggling with a future back surgery so we’re not in the best of shape physically financially we’re pretty solid. Wetruly have adapted successfully to retirement in FL. Not going anywhere right now.

Thanks for your time and feedback

 

[FLSUnFIRE]

My thought, less for financial reasons is option 2. It's a transitory period for her and that house may not be on the path she wants. Renting for a while as she reconsiders where to go/lifestyle she wants will be freeing. She can always buy a similar house. I would try to get the "value" of the mortgage considered in the assets... worth the points to buy down a new mortgage to the same interest rate if she can if she goes this route.

I bought my former spouse out... ended up house-poor but beyond that it also held ghosts of the marriage and I eventually sold it. In hindsight, I wish we sold it as a marital asset (quite a bit of expense involved in selling/prepping I ate that would have been shared). It slowed down my moving on by a few years. My ex, rented for a year and then bought in a nearby neighborhood and then ended up in a different state a few years later (one she had no ties in). I'm sure if you asked her when we were divorcing she would have said she had no intention of moving out of state and much less to the one she ended up in. I like the idea of a clean break for her if there are no complicating factors like children.

Just my 2¢ and probably worth about that

Can you not buy a house jointly owned with your daughter? It will eventually become her house and she can make the payments even though both of you are on the mortgage and title? Probably the most tax efficient way to "give" her the money/help her qualify for a mortgage higher than her income alone would allow.

 

[athena53]

I bought my former spouse out... ended up house-poor but beyond that it also held ghosts of the marriage and I eventually sold it. In hindsight, I wish we sold it as a marital asset (quite a bit of expense involved in selling/prepping I ate that would have been shared).

When I was divorcing I was in a therapy group with other women who were divorcing or had been recently. One had bought her ex-husband out (they did have 2 kids and she had custody) and she was struggling under the debt. Worse, she kept letting him back to fix things because he was familiar with the house and what routine maintenance it needed. Last I heard, he was asking her to put him back on the title.

My attorney asked a couple of times if I'd consider buying out my Ex. That was a hard "No". I wanted to keep my son in the same school district and bought a smaller place that worked out well. It also had lower ongoing costs (utilities and property taxes).

 

[Aerides]

Assume she wants to stay in the home (kids?). Can you just pay her mortgage for the next several months while the settlement and divorce continue, and then figure it out once the dust settles, knowing you'll find a way?

 

[Surewhitey]

Is the $100k "sitting on the sidelines" community property? She's entitled to half of everything likely in TX. This would include half retirement savings too... Maybe cash value of pension if he has one.

Regarding the home, I'd look at the details of homestead exemption if you are thinking of being on the title / deed of the home.

I like the idea of keeping it simple and create a loan for the buyout (minus the would be seller's fees that he's saving on). You could consider the gifting amount given to her for you both ($19k each in 2025 & 2026).

 

[ddk70]

My thought, less for financial reasons is option 2. It's a transitory period for her and that house may not be on the path she wants. Renting for a while as she reconsiders where to go/lifestyle she wants will be freeing. She can always buy a similar house. I would try to get the "value" of the mortgage considered in the assets... worth the points to buy down a new mortgage to the same interest rate if she can if she goes this route.

I bought my former spouse out... ended up house-poor but beyond that it also held ghosts of the marriage and I eventually sold it. In hindsight, I wish we sold it as a marital asset (quite a bit of expense involved in selling/prepping I ate that would have been shared). It slowed down my moving on by a few years. My ex, rented for a year and then bought in a nearby neighborhood and then ended up in a different state a few years later (one she had no ties in). I'm sure if you asked her when we were divorcing she would have said she had no intention of moving out of state and much less to the one she ended up in. I like the idea of a clean break for her if there are no complicating factors like children.

Just my 2¢ and probably worth about that

Can you not buy a house jointly owned with your daughter? It will eventually become her house and she can make the payments even though both of you are on the mortgage and title? Probably the most tax efficient way to "give" her the money/help her qualify for a mortgage higher than her income alone would allow.

Great feedback will consider the last option
We’re rent hunting this week for comparables before I head back east.

She initially wanted to get out as fast as possible. Attorneys have suggested that she hunker down. She has every right to be there while this process moves forward could be another six months to a year minimum three months. She is not the higher income that to be determined once I SSI income

 

[pb4uski]

If you loan her $155k to buy out the husband you will need to include interest as your accountant advises... but you can chose to give her back the interest as a gift so it ends up being a 0% interest loan after the gift. You would have to declare the interest as income on your tax return and pay income tax on the interest and likewise she can deduct the interest if she itemizes deductions (from what you wrote it sounds like she would not itemize deductions).

If she sells her interest to the husband I don't think she can put any of it into her IRA beyond her annual contribution allowance of $7,000 annually unless part of the divorce setlement is that part of the $155k to her is in the form of a divorce settlement transfer of part of his IRA to her, but I wold not advise that she do that since she would eventually have to pay taxes when that money is withdrawn if it is a traditional IRA (but not if it is a Roth IRA). I would go with all cash and forget about the IRA since it will give her more flexibility. At her finances, the benefit of a traditional IRA is probably not very significant.

If she decides to get bought out then make sure that she is taken off the mortgage loan as well as the deed.

 

[COcheesehead]

The house is going to be an albatross around her neck. Too many memories. Break free, start fresh.

 

[ddk70]

Assume she wants to stay in the home (kids?). Can you just pay her mortgage for the next several months while the settlement and divorce continue, and then figure it out once the dust settles, knowing you'll find a way?

No kids - he pays the mortgage & taxes she pays ALL OTHER expense for house - he is not impacted by inflation on the taxes. They had a healthy deposit on that house so mortgage is only 1340 including taxes.

 

[ddk70]

The house is going to be an albatross around her neck. Too many memories. Break free, start fresh.

Thanks another family member has suggested the same as well

 

[ddk70]

Assume she wants to stay in the home (kids?). Can you just pay her mortgage for the next several months while the settlement and divorce continue, and then figure it out once the dust settles, knowing you'll find a way?

No kids. Initially, she didn’t wanted to get out of the house. We’re trying to look at a five-year plan. She has her whole life ahead of her. She’s pretty home savvy. She was on the Board of Directors of her first condo HOA at 27

 

[ddk70]

If you loan her $155k to buy out the husband you will need to include interest as your accountant advises... but you can chose to give her back the interest as a gift so it ends up being a 0% interest loan after the gift. You would have to declare the interest as income on your tax return and pay income tax on the interest and likewise she can deduct the interest if she itemizes deductions (from what you wrote it sounds like she would not itemize deductions).

If she sells her interest to the husband I don't think she can put any of it into her IRA beyond her annual contribution allowance of $7,000 annually unless part of the divorce setlement is that part of the $155k to her is in the form of a divorce settlement transfer of part of his IRA to her, but I wold not advise that she do that since she would eventually have to pay taxes when that money is withdrawn if it is a traditional IRA (but not if it is a Roth IRA). I would go with all cash and forget about the IRA since it will give her more flexibility. At her finances, the benefit of a traditional IRA is probably not very significant.

If she decides to get bought out then make sure that she is taken off the mortgage loan as well as the deed.

Great idea on on the loan and paying back the interest and gifting. She’s a little bit shy on her IRA contributions and feels a need to put it into her Roth . Maybe just a portion or split cash in contribution.

Just advised by Attorney she’s not limited to the annual amount of contribution in a divorce settlement. For her, she feels the need to bump up her IRA account. She sees how her parents us have benefit from their consistent dollar costs averaging into our Ira.
Definitely on the buyout agreed get her name off everything related to the house the sooner the better.

 

[Car-Guy]

Based on info above, I'd say, if you can financially help and are willing to help, I think I'd go with what your daughter wants. I hope she careful and tries to not let the lawyers make too much on this case.

 

[COcheesehead]

If the $100k on the side comes out of no where she can reopen the case and get half of that. My sister in her divorce discovered her ex buried significant funds and they came to light later.

 

[RetiredHappy]

She doesn't need to give up the 3.5% mortgage interest rate. In the divorce settlement, it simply needs to be spelled out. I bought my ex-husband out on his share of our home and I kept the mortgage in both names and serviced the loan from my checking account. The bank doesn't care.

 

[COcheesehead]

It’s a quitclaim transaction if she goes that route.

 

[Kings over Queens]

My opinion, I'd give serious consideration to the soon to be ex husband buying her out and using the funds to settle whatever IRA funding can be accomplished, and putting the rest towards renting, or if she's set on staying in the area, purchasing a different home. You could help fund that purchase with a gift or low interest mortgage.

She gets a fresh start and you can pick up similar interest that you'd get from a high yield savings account, or go the gift route if that's your wish.

 

[ddk70]

If you loan her $155k to buy out the husband you will need to include interest as your accountant advises... but you can chose to give her back the interest as a gift so it ends up being a 0% interest loan after the gift. You would have to declare the interest as income on your tax return and pay income tax on the interest and likewise she can deduct the interest if she itemizes deductions (from what you wrote it sounds like she would not itemize deductions).

If she sells her interest to the husband I don't think she can put any of it into her IRA beyond her annual contribution allowance of $7,000 annually unless part of the divorce setlement is that part of the $155k to her is in the form of a divorce settlement transfer of part of his IRA to her, but I wold not advise that she do that since she would eventually have to pay taxes when that money is withdrawn if it is a traditional IRA (but not if it is a Roth IRA). I would go with all cash and forget about the IRA since it will give her more flexibility. At her finances, the benefit of a traditional IRA is probably not very significant.

If she decides to get bought out then make sure that she is taken off the mortgage loan as well as the deed.

It’s a Roth IRA

 

[ddk70]

She doesn't need to give up the 3.5% mortgage interest rate. In the divorce settlement, it simply needs to be spelled out. I bought my ex-husband out on his share of our home and I kept the mortgage in both names and serviced the loan from my checking account. The bank doesn't

Personally, we need to get him off the mortgage. If she In cannot sustain the mortgage payment it would be subsidized by us

not sure if the bank would allow it as long as they get paid agree still gotta jump over with that hurdle

 

[engineernerd]

She doesn't need to give up the 3.5% mortgage interest rate. In the divorce settlement, it simply needs to be spelled out. I bought my ex-husband out on his share of our home and I kept the mortgage in both names and serviced the loan from my checking account. The bank doesn't care.

That arrangement only worked because your ex was willing to trust you to keep up the payments (or didn't realize he was still on the hook to make the payments if you missed any).

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[Kings over Queens]

I'm fairly certain its not common to remove a borrower from a mortgage, but obviously is dependent on the banks policy. My gut tells me the loan needs to be refinanced with whomever retains the house, and the deed changed as well.

Clearly a call to the bank to see what they can do, if anything, is in order.

 

[engineernerd]

About community property:

Income and assets acquired before the marriage, and inheritances even if acquired during the marriage, are separate property not community property and belong to only the one spouse.

Separate property does become community property if the person commingles the funds, such as by depositing an inheritance into a joint bank account.

 

[ddk70]

Understood thank you

 

[Chuckanut]

Daughter believes he may have 100k sitting in cash on sideline and could afford to buy her out. She does not have the liquidity.

I don't know what your state laws are in regards to divorce, but I think most states require a FULL disclosure of all assets held by both parties. If she believes he has 100K sitting in cash on a sidleline, that sounds to me like he is hiding assets. Or your daughter is wrong. I don't know.

What does her lawyer say?

 

[Chuckanut]

She doesn't need to give up the 3.5% mortgage interest rate. In the divorce settlement, it simply needs to be spelled out. I bought my ex-husband out on his share of our home and I kept the mortgage in both names and serviced the loan from my checking account. The bank doesn't care.

But, if you did not make the payments for some reason, it would also impact your ex-husband's credit rating and he might be liable for the money. Right? In such a situation the bank may not care, but the bought out spouse might. Or is there something about these legal issues that I do not understand? I'm not a lawyer, but I have learned to be very careful when it comes to large amounts of money.