Sibling "Buy-out" in Probate

[NeverBored]

I haven't seen this come up on the forums, and a search didn't reveal any discussion, so....

My mother died in September. I have one brother, and we have been working through her assets together. Her investments and cash were all POD or TOD, and we are gradually getting through closing out those and getting the distributions. Mom was financially comfortable and frugal, and had quite a few investments with various companies. Many are small amounts (I don't want to do this to my kids.)

My question is this. Mom's house, car and one stock have to go through probate. My brother is the personal representative. He wants the house, and I do not. We have agreed on a dollar amount that he would buy me out of all the probate assets, and the probate attorney says this can be done with some paperwork waiving my right as an heir (and a check from my brother to me). This is an ideal outcome for me, as I live in another state and have a husband with serious health issues. My brother and I get along well, and trust each other.

Any red flags? Any experience doing this? Any tax issues? I appreciate any discussion or advice.

 

[OldShooter]

There is a basis step-up on death, so for example if you alone inherit mom's house your cost basis in the house is its market value on the date of her death. This is sometimes screwed up when mom gives her house to someone before she dies, who then gets her basis in the house instead of the step-up. If you can document that the money you get is equal to (or less than) the house's stepped-up basis it is probably a tax-free transaction. The probate attorney should know all about this but you could check with a CPA to verify. IANAL, IANACPA.

 

[obsessed]

This sounds kind of strange to me. If you waive your right to the house, does the house become 100% inheritance to your brother? If so, if he gives you the money outside of probate, is that a taxable gift? I would double check that with the attorney or a CPA.

I had a similar situation but in my case my sibling bought the home from the estate, paying cash to the estate less their share of the total estate. Cash was then distributed out of the estate to the other inheritors.

 

[Dash man]

This sounds kind of strange to me. If you waive your right to the house, does the house become 100% inheritance to your brother? If so, if he gives you the money outside of probate, is that a taxable gift? I would double check that with the attorney or a CPA.

I had a similar situation but in my case my sibling bought the home from the estate, paying cash to the estate less their share of the total estate. Cash was then distributed out of the estate to the other inheritors.

This is sort of how my attorney explained how it would be done with our kids. Appraise the house on our death to set a value, then the value of the home would reduce the cash portion of the rest of the estate they would get. They’d get the stepped up value it was appraised for.

 

[pb4uski]

Seems to make sense, essentially the OP is selling her brother her 50% interest in the house, the car and the one stock for cash. I think she would get a stepped up basis for her 50% ownership interest that she inherited from her mom and then sold to her brother.

 

[pb4uski]

This sounds kind of strange to me. If you waive your right to the house, does the house become 100% inheritance to your brother? If so, if he gives you the money outside of probate, is that a taxable gift? I would double check that with the attorney or a CPA.

I had a similar situation but in my case my sibling bought the home from the estate, paying cash to the estate less their share of the total estate. Cash was then distributed out of the estate to the other inheritors.

I don't think she is waiving her right to the house.... as of her mom's death she and her brother each have a 50% interest in the house and she is just selling him her 50% interest.

 

[Montecfo]

I don't think she is waiving her right to the house.... as of her mom's death she and her brother each have a 50% interest in the house and she is just selling him her 50% interest.

In my opinion, that's what should happen. I do not really understand how the probate is part of it.

Simply settle the estate and sell the 1/2 interest. No gain or loss.

 

[audreyh1]

Im looking to divide DF’s farm, which includes a house, and one sibling may get the house and some surrounding land and then own a reduced portion of the remaining farmland. This is a simple division of an existing property, although appraisal of the division is required to make it equitable. Can’t an executor divide the total estate however the heirs want it as long as it’s evenly divided?

 

[SecondCor521]

Can’t an executor divide the total estate however the heirs want it as long as it’s evenly divided?

No, they must follow the terms of the will.

If the will says "effect an equal division of my property among my heirs as the executor sees fit", then yes.

I don't think most wills are written that way. But it's possible that some (or even many or most) are.

It's the decision of the decedent, not the heirs. Although there are ways around it (TEDRA, disclaimers).

 

[OldShooter]

This is sort of how my attorney explained how it would be done with our kids. Appraise the house on our death to set a value, then the value of the home would reduce the cash portion of the rest of the estate they would get. They’d get the stepped up value it was appraised for.

This is what we did when my mother died. I helped her write the will, splitting everything equally $$-wise, giving the family lake home to my brother and sister. (DW and I had bought across the lake.) The will specified that the lake home value calculation was to be based on the county's Estimated Market Value. Those are usually a tad low, so I probably left some money on the table, but I did not want to risk a fight with my siblings over what the value was. That also drives a pretty solid stake in the ground to establish the tax basis they received.

 

[pb4uski]

Im looking to divide DF’s farm, which includes a house, and one sibling may get the house and some surrounding land and then own a reduced portion of the remaining farmland. This is a simple division of an existing property, although appraisal of the division is required to make it equitable. Can’t an executor divide the total estate however the heirs want it as long as it’s evenly divided?

No, the executor needs to follow the terms of the will... but I think you probably meant something different.

Typically there might be specific bequests (jewelry, personal property and other stuff to specific beneficiaries) and everything else is the residual estate and is bequested to one or more people, often equally but sometimes not.

In theory, any residual estate property would be sold and the proceeds divided consistent with the terms of the will, but there is no reason why property can't be "sold" to other beneficiaries at mutually agreeable values and then the net amount distributed.

So if there is $400k of cash and the family homestead valued at $500k and only 2 of the 3 beneficiaries are interested in, then one beneficiary would get $300k of cash and the other 2 beneficiaries would get a 50% interest in the homestead and $50k of cash... but each beneficiary gets $300k of assets.

It's the same result as if the homestead was sold to the 2 beneficiaries that want it for $500k in cash and then the $900k of cash was distributed to the 3 beneficiaries... $300k each.

The rub is that all beneficiaries need to agree on the valuations and the distribution, preferably in writing.... and that is often where skirmishes or hard feeling occur.

 

[ziggy29]

Is there any way you can agree to a different division of the assets within the estate, or is the will clear that this isn't allowed? If a will is vague (such as "my estate divided equally between my heirs"), that doesn't have to mean exactly half of every item or account in the estate, as long as in the aggregate the estate was equitably divided -- does it? (Clearly I am not a lawyer.)

For example, let's say half of the equity in the house is worth, let's say $200K for the sake of example. If there are enough assets (especially liquid assets) in the estate, perhaps it can be set up so that one heir gets the house, and the other gets an extra $200K in assets elsewhere in the estate? If there are sufficient assets in the estate, I would think that is legally "cleaner" than writing a check outside of the estate settlement process.

That said, if you went the route the probate attorney is suggesting, I'd probably want a second opinion from another tax/estate attorney and/or a CPA to get warm fuzzy about it. The good news is that with the step up in basis, chances are you would have no capital gain on the sale of your share of the house.

 

[Stormy Kromer]

Sorry for your loss.


It sounds like you're on good terms with your sibling. That is the most important thing of all here. Let the lawyers and accountants know what you have agreed on and trust their professionalism.


I've seen families torn apart forever over estates much smaller.

 

[ziggy29]

It sounds like you're on good terms with your sibling. That is the most important thing of all here. Let the lawyers and accountants know what you have agreed on and trust their professionalism.

Yes, that matters a LOT. I was the successor trustee for my mom's estate, and we had to divide it in four equal parts. Fortunately there were no fights about anything. Between that and our parents having the foresight to put almost everything in trust, liquidating the estate was not nearly the horror for me as I've heard some report. It helped that we sold her house quickly and deposited the proceeds into the trust's bank account, and we divided all the cash four ways, minus some advances a couple of my siblings took on their share.

 

[Bamaman]

When there is a new estate, first thing that needs to happen is to get a fresh appraisal on the house. You want to document the current value of the property if it becomes an issue.

It often works best if all of the investment accounts are rolled into one big account that can be turned into cash quickly. Estates have expenses that require cash. It's also nice to keep things simple.

Make sure the attorney will process the probate as fast as humanly possible, especially if the estate will have income. Trusts are taxed at higher rates than individuals, and time is sometimes of the essence. (My mother's estate took too long to close due to an attorney dragging her feet.)

What you're going through is very typical. I'm glad you both get along well.

 

[Texas Proud]

Just me but I would think that it best if your brother bought the house from the estate and paid the full price and then the proceeds are distributed equally...



But it is interesting.... sounds like he is paying you for your half of the estate... but not through the estate... which means he will have to pay any tax on income earned by the estate after death...


I see nothing wrong with it as long as the paperwork has the full agreement of what is going on and the payment amount... IOW, connecting the waiving of the estate with the receipt of the check...

 

[Montecfo]

Just me but I would think that it best if your brother bought the house from the estate and paid the full price and then the proceeds are distributed equally...



But it is interesting.... sounds like he is paying you for your half of the estate... but not through the estate... which means he will have to pay any tax on income earned by the estate after death...


I see nothing wrong with it as long as the paperwork has the full agreement of what is going on and the payment amount... IOW, connecting the waiving of the estate with the receipt of the check...

This seems needlessly complicated. Why not just settle the estate and do the buy/sell after?

Then it is all tax-free and everyone is happy. No unfavorable re-interpretation by tax authorities is possible.

 

[chassis]

In my opinion, that's what should happen. I do not really understand how the probate is part of it.

Simply settle the estate and sell the 1/2 interest. No gain or loss.

This.

 

[kjpliny]

One thing that comes to mind regarding the house is that there are some people, especially older people, who may have hoarded and hid precious valuables like gold/silver, collectible coins, jewelry, and cash somewhere on the property. My father is one of these people. If there is a possibility that your mother (or whoever she lived with earlier) may have squirreled away something, then your brother would be the new owner of it all. You might want to make an arrangement or agreement in case your brother experiences a lucky "find" in the future.

 

[NeverBored]

OP here. Thanks everyone for advice and opinions. That gives me more to think about.

Mom did not have a will. The only assets in probate are the house, an old car, one stock worth about $10,000 and savings bonds worth about $2000. We have cleaned out her house; there was nothing of value other than photos, interesting documents and my baby book. ;-) Her good jewelry had been stolen years ago, her furniture wasn't worth anything...we donated what we could to charity. There are very limited assets to put in the estate account - basically the savings bonds and sale of the car. The stock is in process. My brother and I are paying mortuary and attorney expenses outside of probate.

Bank accounts, brokerage, annuities were all POD or TOD and we've been working through them. We've each received a nice amount from these assets. The house is not in good condition and needs repairs and updating. The attorney suggested selling it quickly to an investor. We had an offer, and that's when my brother decided he wanted the house.

My mother and I had some hard discussions about estate planning, and she basically refused to create a trust or even a will. She kept saying that "everything" was payable to us anyway and she didn't see the need. I found a file where she had been working on a beneficiary deed (think that's what it's called) that would have given the house directly to us outside of probate. She never finished it. We literally did not know what her financial situation was until we found years of paperwork and I eventually sorted it out and created a spreadsheet of all the assets I could find. Turned out she was a decent investor and had saved quite a bit of money. Most of her cash was in Wells Fargo (where I also bank) and they were wonderful to work with. The credit union and BofA, not so much. It's been three months and those two institutions still have not processed the disbursement. Accounts clearly designated as TOD still require a lot of paperwork, notary or medallion signatures, and multiple phone calls.

Anyway, I really just want to walk away, and am happy with the lump sum agreed upon. I don't want a taxable event. I will think some more on how to do this, and will also talk to our CPA.

When I'm finished with mom's estate, I am going to try to clean up our investments and see if I can convince DH to consolidate. I really don't want our kids to go through this. I've already written "the Letter" detailing where our trust papers are, our investments and attorney information.

thanks again.

 

[Texas Proud]

This seems needlessly complicated. Why not just settle the estate and do the buy/sell after?

Then it is all tax-free and everyone is happy. No unfavorable re-interpretation by tax authorities is possible.

We do not know what the brother wants to do.... he might want to keep it in the estate for some reason...


We have a REALLY REALLY small gas interest that was owned by my father who died in 1980... I still get checks to his estate... my mom never did get it changed and now that she passed it is not worth it for me to spend my time doing so....

 

[Involuntary Retiree]

We have a REALLY REALLY small gas interest that was owned by my father who died in 1980... I still get checks to his estate... my mom never did get it changed and now that she passed it is not worth it for me to spend my time doing so....

What do you do with the checks? I assume you live in Texas? If so, you might want to research "Texas Affidavit of Heirship" to see whether it might apply to easily (but not quickly) clean up mineral interest title problems.

 

[Montecfo]

We do not know what the brother wants to do.... he might want to keep it in the estate for some reason...


We have a REALLY REALLY small gas interest that was owned by my father who died in 1980... I still get checks to his estate... my mom never did get it changed and now that she passed it is not worth it for me to spend my time doing so....

Well it sounds like the mineral interests are simply mistitled.

In this case no reason to leave the estate open and good reasons not to in my opinion.

 

[Z3Dreamer]

I wanted to rant even though it sounds like OP has made up her mind. First, Stormy Kromer hit the nail on the head. If you have the opportunity to cash out without destroying your relationship with your brother, do it. Even though you may not get an exactly even distribution. Let the professionals figure out the mechanics.

I have seen a few cases where the beneficiaries had such an opportunity. I advised them to take the deal. They did not, because they wanted their "fair share." So everyone got their own attorney who wanted their own appraisals. Because attorneys and appraisers are not free, they are getting less than the original deal. And the family is irreparably damaged. "Why the (insert favorite expletive) did you ask me, if you weren't going to follow my advice?"

 

[Texas Proud]

What do you do with the checks? I assume you live in Texas? If so, you might want to research "Texas Affidavit of Heirship" to see whether it might apply to easily (but not quickly) clean up mineral interest title problems.

Well it sounds like the mineral interests are simply mistitled.

In this case no reason to leave the estate open and good reasons not to in my opinion.

We always just deposited them in my mother's checking account... if we are lucky we get about $100 a year..


Will look into changing them if it is simple... not worried about how long it takes for THEM to do their work, I just do not want to spend a lot of MY time..


BTW, I asked all 5 of my siblings if they wanted the interest.... all said NO...


Wish I could sell it...


BTW, we do not leave open the estate in any other way... just get a check and deposit it... put income on mom's return...