How parents can be fair to two sons who stand to inherit their valuable home

Mailbag

October 03, 2004|By Tom Hamilton | Tom Hamilton,KNIGHT RIDDER/TRIBUNE

Dear Mr. Hamilton:

My oldest son wants to buy our house as an investment and give us $700,000 for it. He is going to rent us the house back for approximately $2,000 in monthly payments. We can stay after the deal in "his" house as long as we live.

I am 80 years old and my wife is 65 years old. We have income from Social Security in the amount of $28,000 and we draw from our IRA investment $10,000 a year. (At this time our investment is valued at $120,000). There is still $180,000 outstanding in mortgage payments, which we are going to pay off from the $700,000 we will get from the deal before closing.

But there is a problem. We have another son, who is also as a beneficiary to get 50 percent of the inheritance. Our house at this time can be sold for $900,000 to $1.2 million. We do not want our younger son to be excluded from this deal. What will be the best approach?

Dear Reader:

Bring both sons together with you and your wife to discuss this proposition. At this gathering, the goal should be to create a viable situation for everyone. If your sons can agree to the deal, then all is done. Otherwise, you will have family issues to consider in making a decision. Interestingly, I believe that part of your older son's $700,000 "investment" could eventually become part of your younger son's inheritance.

Regardless of the final decision, I would do everything possible to make sure that both of your sons openly and honestly agree without apprehension to this situation. In the past, families have gone to war over these kinds of arrangements.

Dear Mr. Hamilton:

My son has about $5,000 to put down on a home. A relative would like to invest with him as a way to help my son out and also for profit when they sell the house in five to 10 years.

The relative has $200,000 to invest. My son would live in the home, pay the mortgage, taxes, etc. The relative would not be responsible for anything other than the $200,000 initial investment. When the house is eventually sold, what is a fair and equitable way to split the profit considering each person's initial down payment and the one person's monthly/yearly expense?

Dear Reader:

"Fair and equitable" is in the eye of the beholder. One might say that a fair sharing would allow each person to keep track of their investment position in the property using a common approach in investments called "capital accounts." A capital account would track and allocate actual investment proceeds for each investor.

Part of this capital accounting would be an allocation for "use," which your son would benefit from (living there in place of paying rent elsewhere), along with obligations that your son would pay (mortgage, taxes, etc.). By keeping track of these figures on a cumulative basis, at the sale of the property each will be able to determine their "share" of the net proceeds.

So, my answer is still "in the eye of the beholder." Regardless, both must agree in writing to this arrangement, and that is the best way to prevent future misinterpretations and misgivings about the situation.

Tom Hamilton is an associate professor at the Shenehon Center for Real Estate Education at the University of St. Thomas, Minneapolis.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.