I am a 56 year old man and live in my family home with my father, 93, who has type 2 diabetes, has a pacemaker and is legally blind. My mother died five years ago. He is otherwise healthy and well taken care of. Because he is blind, he needs around-the-clock care. My girlfriend of 10 years lives with me and helps me. We are his caregivers.
I also have a sister, who just started an apartment where people wait years to be put on a waiting list. I was able to engage her based on my connections with management. She is a spendthrift and has not worked in years, and while living with my father before I took office, she spent thousands of dollars of his money.
Last April, my sister charged $20,000 on our father's credit cards and attempted to get over $13,000 from his bank account. She wrote two checks – one for $8,000 and one for $5,000. Fortunately, the bank did not cash the check for $8,000. What we want is for him to leave his house to me to help me and my sister. My father will live here until he dies.
When he resigns claim to the house to me, I will own it outright and get an immediate loan for the equity value of the house. I plan to purchase a lump sum annuity of $200,000 over 20 years, giving my sister about $1,400 a month plus her Social Security disability insurance. We will then split the balance of my parents' estate – $100,000 each.
Here are my questions about my parents' house: What's the best way to do this? I own my own business, and I can't get a home loan until I take over my parents' house. I'm looking for some expert advice on how to do this. We thank you in advance for any help and/or advice you can provide.
Son
Related: I want my son to inherit my house worth $1.2 million. Do I leave it to my second husband in my will? He promised to pass it on.
“Choosing to do your own version of a reverse mortgage by tapping into the equity in your parent's house to provide income for you and your sister today seems opportunistic and reckless at best.”
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Dear son,
This is a terrible idea. It's a terrible idea for you, your sister, and your father.
Let's say your father gives this house to you now, while he's still alive, and you sell the house. You will have to pay long-term capital gains tax on the property, if or when you sell it, on the price you paid for the house and not on the value of the house when you inherit it. This is called a “step up in basis,” and you will lose this tax advantage by stopping claiming now.
If your father deeds his house to you and it is worth $1 million after his death, a 100% increase over the purchase price, you will be required to pay capital gains tax on the original purchase price ($500,000) to the Internal Revenue Service, if you sell the property. With increased basis, you'll only pay capital gains tax when its value rises above $1 million.
Furthermore, you are proposing to take out a home equity loan in order to purchase a total annual amount of $200,000 over 20 years. With interest rates above 6%, you're facing a payment of at least $1,200 per month. You're putting yourself into debt to buy this annuity, effectively robbing Peter to pay Paul.
Research has shown that people do not always act wisely when they receive a lump sum annuity. Some analysts refer to this as the “lottery effect.” According to this MetLife survey, one in five retirement plan participants who chose a lump sum from a defined benefit or defined contribution plan say they have exhausted that amount, exhausting their money within 5.5 years on average.
The price for taking care of your father
Another problem: Your sister has proven by telling you that she is untrustworthy – someone who squanders the money given to her and asks for more. Or, assuming what you say is true, they may take what they want, regardless of the consequences. Why go through this financial gymnastics? Is it hers? Or for yourself?
The other thing that overshadows your desire to ransack your father's house for money even while he's still living there: your job. Carefully examine your motives for taking this unusual step while your father is still alive. What if you fall on hard times and the bank forecloses on the house? Where will your father live then?
Children usually inherit their parents' property after the death of their last parent; Choosing to do your own version of a reverse mortgage by tapping into the equity in your parent's house to provide income for you and your sister today seems opportunistic and reckless at best. Let your father live the remaining years of his life in peace.
Your father has been lucky to have you and your girlfriend taking care of him for the past few years, given his multiple health problems, but what is the cost of this care? What if you can no longer care for him and he needs to be admitted to a long-term care facility, or needs professional medical help?
His home is his only source of income and stability. Please don't take that away from him.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
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Previous columns by Quentin Fottrell:
My parents want to pay off their $200,000 mortgage and move into my rental home. They say I owe my sister $100,000. Is this fair?
“I hate working 9 to 5”: I want more time with my newborn son. Should I quit my job and dip into my six-figure trust fund?
