Real Estate Capital Gain Question

[ivinsfan]

I know you have talked about this piece of property before as to how to buy out your SILs. at this point your only family friendly option IMO is to simply list the property with a RE agent and see what happens. At this point you are all in a stalemate.

And in all honesty it's not greedy for your SILs to want market price for an asset they own. As for RE agents many many of them start with a pie in the sky price to catch a listing. That is the way of the world sadly.

 

[Jerry1]

I know you have talked about this piece of property before as to how to buy out your SILs. at this point your only family friendly option IMO is to simply list the property with a RE agent and see what happens. At this point you are all in a stalemate.

And in all honesty it's not greedy for your SILs to want market price for an asset they own. As for RE agents many many of them start with a pie in the sky price to catch a listing. That is the way of the world sadly.

Unfortunately, family friendly has gone out the door. The stalemate is mostly due to the fact that no one is talking. Personally, I’m trying to think of ways, once any discussion happens, to try to find some workable solution. The good news from mine and DW’s point of view, is that the stalemate results in the old trust staying in effect. So there’s no reason for DW to try to initiate anything. The ball is in their court. I’m guessing the new year may bring some movement. We’ll see.

 

[pb4uski]

You say that you think there is a need to close out the old trust now that both parents are gone. That may be true but irrespective of what you or anyone else or even the trustees think, what does the trust say? Think of the trust as a contract between the grantors and the beneficiaries, and the trustees job is simply to administer the trust. What does the "contract" say?

If there was really a second trust that replaced the first trust then the terms of that second trust may prevail. That said, it might not. If the first trust was a joint revocable living trust it may have become irrevocable when the first grantor died and if that is the case then the second trust is null and void. The exact situation is unclear and the details matter. However, from what you wrote it seems possible that no matter that the sisters "think" that they really have no right to the land or any proceeds from the sale of the land and that issue needs to be decided first.

ETA: On second thought, if the first trust was set up for Medicaid LTC planning, it would have had to be irrevocable so some of what I wrote above doesn't really apply. Also, generally the terms of the first trust could not be changed because the trust was irrevocable, especially after the death of one of the grantors.

 

[cathy63]

... I think there’s a need to close out the old trust now that the parents are both gone. As we sit, the terms of the trust are still in force, but something is requiring a sale or agreement on new trust language...

This part doesn't make sense to me and it sounds like you aren't really sure either. Land can stay in an irrevocable trust for multiple generations. If the three sisters are trustees/beneficiaries of the trust and your two daughters are also beneficiaries, then all five of them should have a copy of the paperwork. Since you're closely related to three of these people, you should be able to get a copy and read it to see exactly what it says about the rights and obligations of the trustees.

If two of the trustees just want to ignore the provisions of the trust, then the only way to prevent that is for the third trustee or the beneficiaries to bring a legal action and have them removed as trustees. That's your solution for keeping the land in your part of the family, but it obviously means that your wife's family will disintegrate.

Also, you are calling your sisters-in-law greedy, but it's really your in-laws who created this problem by setting up an unfair situation. They had $300K plus a piece of land that might or might not be worth $300K for a total perceived value of $600K. Your wife and her daughters are getting 2/3 of that value (or 61% if your appraisal is more accurate) while each of the other sisters gets 1/6 (or <20%). Try to put yourself in their shoes and I think you'll see why they are questioning your wife's choice to just go along with their parents' decision to give her 3x to 4x as much as each of them. I can guarantee they do not think they are the greedy ones in this picture. If I were in this situation, I'd be pretty hurt that my parents demonstrably cared more for my sibling than for me and that the sibling just accepts that as her due.

Your wife has to make a choice here, sentiment or sisters. She can't have both unless she can find enough money to undo their parents' poor estate planning choices.

 

[ivinsfan]

Unfortunately, family friendly has gone out the door. The stalemate is mostly due to the fact that no one is talking. Personally, I’m trying to think of ways, once any discussion happens, to try to find some workable solution. The good news from mine and DW’s point of view, is that the stalemate results in the old trust staying in effect. So there’s no reason for DW to try to initiate anything. The ball is in their court. I’m guessing the new year may bring some movement. We’ll see.

That's too bad. Perhaps some time will help. And as you say, no movement keeps the property in the family. The hard part is it's really, really hard to find an independent experienced appraiser that everyone trusts. At this point your piece of property is worth what someone will pay for it. That is the proof of the pudding. For example farmland is the exact same issue. I couldn't even guess what a 80 acre piece of farmland should sell for. Owners wanting to sell don't even bother with an appraisal, they just call an auctioneer. The banks have plenty of appraisers to help balance their books. But they are interested in helping their borrowers stay flush. Much like the property you would like to buy, unless someone shows up with their checkbook the value is a moving target.

This is kind of a new development. When my last in law died my DH and his brother sat with his 2 non farming sibs at the kitchen table. His parents had the original home farm. After a few minutes of discussion they all reached a price everyone was happy with and the moved on to the lawyer to do a sale and that was that. I don't know if that's possible in todays world. Good luck

 

[pb4uski]

... Your wife has to make a choice here, sentiment or sisters. She can't have both unless she can find enough money to undo their parents' poor estate planning choices.

^^^ If the trust was really irrevocable, then the wife doesn't have a choice, nor do the sisters... the trustees must follow the terms of the trust in what happens with the land.

 

[pacergal]

Perhaps a visit with an estate lawyer might give you some answers to your questions.
Why does your wife think she needs to redo the trust now that her last parent has died?

 

[cathy63]

^^^ If the trust was really irrevocable, then the wife doesn't have a choice, nor do the sisters... the trustees must follow the terms of the trust in what happens with the land.

I somewhat disagree with this. Yes, the law says they "must" follow the terms (unless they're discriminatory or otherwise illegal), but it happens all the time that trustees agree amongst themselves to do something else. There's no outside mechanism to enforce the terms unless somebody goes to court. That takes time and money, and the trust may have to hire the lawyers to defend the trustees, so then they have to sell the land to pay the legal bills.

 

[RetiredHappy]

A piece of land is only worth what someone wants to actually buy it for.

Here's a true story. My friend bought a piece of land for $450K in 2012, planning to build a dream retirement home. It's in a "reserve" and there remains a ton of unsold lots. This person paid about $200K for a design etc and decided not to proceed and property tax on that land is $20+K a year. She tries to sell it since 2016, listing for anything between $800K to $1.2M. Anyway, she has now dropped it to $400K, 12 years since she bought it and there are still no takers. In the meantime, the county has reassessed the land to be worth $1.2M and her property tax is now $35K. She continues to bleed money on a piece of land that no one wants. She and her husband make a ton of money and have 8 digits in wealth but still, they really no longer want the land and cannot get rid of it.

 

[pb4uski]

I somewhat disagree with this. Yes, the law says they "must" follow the terms (unless they're discriminatory or otherwise illegal), but it happens all the time that trustees agree amongst themselves to do something else. There's no outside mechanism to enforce the terms unless somebody goes to court. That takes time and money, and the trust may have to hire the lawyers to defend the trustees, so then they have to sell the land to pay the legal bills.

^^^ I agree with you that the trustees and beneficiaries can all agree to something different if they want, but substantively the trustees are distributing the property in accordance with the trusts terms and then the beneficiaries are agreeing to a different distribution. I think technically there are two different "transactions" but are essentially bundled. Also, what the trust says gives the beneficiaries leverage in the negotiations because at any time the beneficiaries can say... since we can't agree let's just follow the provisions of the trust... and the beneficiaries can have those terms enforced but a court of need be.

 

[SecondCor521]

It turns out that it is possible for the terms of a trust to be changed after the fact, even irrevocable trusts. In my state (and one other), it's done via a law called TEDRA; in other states I think it is done by a method called decanting.

However, the issue with changing the trust is that all of the people impacted by the change are made aware of the process via legal notice. They would either all have to agree to the changes OR some of the parties would have to get a court to sign off on the changes (and the other parties could object and argue in court).

Another drawback is that this process involves expensive lawyers and a lot of time and hassle.

Since it sounds like the sisters are trying to, er, disenfranchise at least some of the grandkids (I'm not 100% clear on the family structure), I doubt a court would go along with that, nor would the parents of those affected grandkids.

Having been through a peaceful version and knowing the price tag and cost and hassle of that, I would not recommend it to OP for this land given it's value and the different opinions.

...

Another possibility I thought of is a buy/sell arrangement. The two sisters wanting to sell name a price, then OP's DW gets to either buy them out at that price or sell to them at that price. Or vice versa. It's the classic example of two kids who want a fair slice of birthday cake - one cuts, the other chooses. The main challenge is that here there are three parties instead of two.

...

Unfortunately, since there is clearly a difference of opinion among the parents and sisters about what should be done with the land, and there is a difference of opinion among the sisters regarding the value of the land, and there is the potential unfairness aspect of the distribution that cathy63 mentioned, the real question boils down to whether or not those conflicts are going to be resolved.

I'll venture a guess that it will come down to deciding among money, grandkids, honoring parent's wishes, maintaining a relationship with the sisters, maintaining self respect, and complying with tax and trust law and fiduciary duty.

...

My will says my property is sold and proceeds net of selling expenses go to my estate, where it is distributed in thirds to my three kids, precisely because I've seen this type of story several times and it rarely seems to end well.

 

[pb4uski]

^^^ I'm aware that even irrevocable trusts can be changed if all parties agree, but it is cumbersome and expensive and in this case it is clear that the parties that would probably not agree with changing the trusts provisions so I've ignored that possibility.

 

[Texas Proud]

Let me throw out another thought... or two...

Can the land be easily divided? If so, split it into 3 lots and let the sisters sell their piece of land for whatever they get for it...

OR, they cannot force the 3rd sister to sell... now, this goes against what it SEEMS like that your DW only owns 1/3rd of a trust... not the land itself..

It really matters what the trust says and what the trustee can do... and who really is the trustee.. my take is if the land is owned by the trust and the trust can sell it instead of passing it to the beneficiaries... and all 3 are really trustees then 2 of the 3 trustees can agree to sell the land... guess it looks like a visit to an attorney is in your future..


OHHH, ETA... when I was young my Dad was a RE agent... one family had a hunk of land and they needed 17 signature to sell... some refused to sign for years.. land just sat unsold...

 

[67walkon]

If the parents died owning the property, your wife and sisters would have a basis equal to the value when the parents died. Figure out if you can undo the gift, if a parent is still alive, and the capital gains issue is resolved.

 

[SVHoper]

Can you divide the land in 3, each w Lakefront. Then they can do what they want with it. You don't need a lot of land for a camper

Alt sell for $300k/3 add $100k and buy a lesser lot close by or more convenient so you and your daughters will use it and think of grandparents as they enabled it.

 

[yclipse]

There’s property in our family held in trust between DW and her two sisters. Their parents gave the property away with the goal to shield it from Medicaid if it came to that. It didn’t. Anyway, now the two sisters want out. DW doesn’t want the land at the price being asked, but I was wondering if there was a way to avoid the capital gains for the sisters which would allow them to take less for the property and still be whole. Note, because the property was gifted to them, the basis is minuscule so practically all gain.

But - what if they gift their share to DW and DW and I gift them money? I’m guessing this isn’t proper, but I’m not sure how it can be regulated. Is there some way this could work given that it’s all within the family? I realize there’s a substance over form issue here, but I’m not seeing what would prevent us legally from doing this. We all have the right to give money and property away. And, the basis would stay the same so if we ever sold it, then the gain would be taxed. Of course, my hope would be that we could hand it down to one of our daughters and give them a stepped up basis.

Thoughts?

Don't be afraid of the long-term capital gains tax. It's paid only on recognized capital gains, and almost always that occurs at a time of the taxpayer's choice. And it is paid at a favorable rate. Hell, the rate is 0 in some cases.

This all found money, after all.

 

[Stormy Kromer]

If Greed has entered the equation there is no way to buy this property at a fair market price. I don't know if I'd call this situation greed, finding out what your property is worth is only prudent. Have an auction or list it with a respectable realtor and buy it on the open market. A realtor's job is to get what the price that the property is worth, it could be worth $300k. Especially if its waterfront.

If you don't buy it at appraised price or on the open market your relatives, (and their heirs) , can haunt you forever for selling you their land "cheap".

I don't see any legal way to gift back and forth. What happens if someone dies during the gifting and it doesn't follow through? The best option to lower tax impact would be an installment sale, say a 30 year contract for deed, that would spread the LTCG over a period of time and possibly keep them in the lowest possible tax bracket each year.

 

[piccolopat]

Don't forget that in the interim, there are taxes, insurance and possibly maintenance (mowing?) that have to be paid. Then there would be real estate transaction fees, the agent's cut and capital gains taxes. $50k each might be low, but the sisters won't be netting $100k each even if they can sell at the $300k. I like the suggestion of getting a right of first refusal. It might pay to get a second appraisal of your own to see which number is more accurate.

 

[pb4uski]

If the parents died owning the property, your wife and sisters would have a basis equal to the value when the parents died. Figure out if you can undo the gift, if a parent is still alive, and the capital gains issue is resolved.

IIRC, there was no step up in basis because the land was put into an irrevocable trust for Medicaid LTC planning. Hoist by their own petard methinks.

 

[Stormy Kromer]

Don't let this land ruin your family.