Recently, my parents sold their apartment to fulfill their long-time desire to live in a downtown apartment, providing them with greater convenience for shopping, socializing with friends, and fostering a stronger connection to the community.
My parents suggest using the proceeds from the sale of the condo to pay off my mortgage, an amount that precisely matches the balance owed. The challenge arises because I still have a mortgage on my apartment, and initially intend to rent it out to cover the monthly payments.
To complicate matters further, my older sister is entitled to 50% of the money from the sale of our parents' apartment, since there are only two children in the family. If they settle my mortgage, how do I determine my sister's future claim on my condo?
Assuming that the sale of the apartment will bring $400,000, with $200,000 set aside to settle my mortgage, my parents assert that after they die, I must return this amount to my sister. However, I wonder if it's really that simple, considering the potential inflation of this value over time.
Instead, splitting the $400,000 evenly now would go to $200,000 to my sister and the remaining $200,000 to me. However, this is not enough to cover my current mortgage, requiring my parents to cover the balance. I question the fairness of this, especially asking them to handle the monthly mortgage.
I ask for your advice on this matter. Thank you.
The other sister
See also: My sister and her ex-husband, in their divorce decree, promised to repay my loan. They never did. Is this legally binding?
“I see what your parents, and to a lesser extent, you, stand to gain: They'll live somewhere rent-free for the rest of their lives, and you'll get $200,000 up front.”
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my dear sister,
This is much more complicated than it needs to be.
Your parents cannot pay your mortgage if they ask to give 50% of the $200,000 to your sister as their inheritance. It puts you in a difficult position: You then owe your sister a debt to give her $100,000, a debt I suppose you would honor, but this column is full of such arrangements where agreements were made (but not signed) and people reneged on them after their parents died.
Another difficulty: If they pay off your mortgage, and your condo increases in value by 50% over the next 10 years — or more years, hopefully with your parents having a long, healthy life — would you repay your sister $150,000 or $100,000? ? Your sister won't be an investor in your apartment, so giving her the $100,000 she was getting initially might seem like a reasonable solution.
I see it for your parents and, to a lesser extent, for you: They live somewhere rent-free, and you get $200,000 down. But they're actually only giving you $100,000, and if you go ahead with this, your parents will effectively loan you the other $100,000. Ask them to keep the proceeds from their apartment, as they may need it in an emergency, and rent an apartment in an area of their choice.
But what if there was a real estate crash and an apartment worth $400,000 now was worth $200,000 at some point in the future? What if there is flood damage and you don't have enough insurance? What if your sister cries and says she wants money tomorrow? What if your parents become frail as they age and need to move into residential care, and their money is kept in your apartment?
If your parents pay off your mortgage, and live another 20 years, they will live in a $400,000 apartment at a cost of $200,000 to them, and you will not receive any rental income during that time. When you rent a home, you also benefit from several tax write-offs, including depreciation, advertising expenses, maintenance, and repairs. You will not be able to claim these things, if your parents are living there rent-free.
Seek legal advice
It bears repeating: Never make such a major financial decision without the help of legal counsel, especially if you are dealing with family members. Gary Botwinick, chair of the Wills, Trusts, Estates and Tax Practice Groups at Einhorn Barbarito in Denville, New Jersey, sympathizes with you — and your parents. “The issue of equality of children in an estate plan is one of the most challenging issues for a parent, especially when one child has current needs and one or more children do not,” he says.
It is suggested that your parents can pay off half of your mortgage and give your sister her share of the inheritance now. Second, they can give each of you a cash gift, which each of you can choose to spend as you wish. Third, Botwinick says your parents can pay off your mortgage and buy an interest in your residence, if they have the money, and leave that interest in your residence to your sister when your survivor dies. (This seems the least attractive option to me.)
Families – or family systems, as psychologists sometimes call them – have a complex set of values and expectations that people may or may not be aware of. People are conditioned to accept certain things and behave a certain way in the family, and if they deviate, sometimes other family members are encouraged to intervene. Do not feel obligated to accept this arrangement.
If you decide to decline their offer, and rent to your parents (rather than an independent third party), ask them to sign a rental agreement. It's good practice. There would be no disagreement over who was supposed to pay for what. But would you be willing to increase the rent for your parents if property taxes went up and the rental market improved? For all the reasons mentioned above, it is best to avoid mixing family and finances.
Maintain your financial independence, and help your parents find another property.
More from Quentin Futrell:
'My 75-year-old father died intestate': Ex-wife, fiancée and children hide his financial documents. what can i do?
I want more time with my newborn son, but my husband doesn't work. Should I quit my job and dip into my six-figure trust fund?
My husband bought our house by inheritance. I signed a demand to resign. He said I could live there after he died, but he changed his mind. What now?
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