Goodspeed: Different ways to share an estate
QUESTION:My mother has told my sister and me that she plans to leave everything equally to us both, including her house which she owns without a mortgage. My sister says she wants to keep the house and live there. I do not. I live in a different city and have my own house. The problem is that my sister cannot afford to buy me out. We get along and don’t want to fight over this. Do we have any options that would allow her to keep and live in the house and me to get my half of my inheritance?
ANSWER: I am glad you and your sister get along, and are discussing this now while your mom is still alive. Too often, a parent dies and emotions take over. Son I am very happy you are talking about this now.
First off, you say your mom intends to leave her estate equally to you both. What else, besides her house, is part of her estate? Stocks? Bonds? Retirement accounts? Jewelry? Family heirlooms? Vehicles, etc.?
When your mom dies, I assume the two of you will be named executors of her estate. Once you have been given power over the estate, you will have to value all of the assets in the estate. You will need to do this for the estate tax return you will have to file.
It will also be helpful in figuring out how to divide up the estate equally between you and your sister. For example, if the house is worth $600,000, and her other assets $600,000 – voila! One can take the house and one the other assets and everybody is happy. If the house is worth $600,000 and the other assets $300,000, the one taking the house will owe the other $150,000 to make everything equal.
If your sister cannot afford to pay you this amount or the house is all there is in the estate and she cannot afford to pay you half its value, she could do a cash out refinance, which should give her enough liquidity to pay you off.
If your sister cannot qualify for a large enough mortgage, you could both own the property as tenants in common, but this could get complicated. Once you both own the property, your sister will have to make periodic payments to you to buy you out.
You could establish a payment plan, but you need to get something in writing. If it is not done correctly, the sibling receiving the money could end up paying taxes on that amount which you want to avoid.
The idea is that each of you should get one-half of the home or equivalent money without owing taxes on the inheritance. You should talk to a good attorney to set up a contract. The contract would not only establish a payment plan, but address other scenarios, such as what happens if one of you dies, your heirs want to remain in the house, etc. Make sure you cover all possibilities.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: firstname.lastname@example.org.