Is my logic sound?

[stebbinsd]

What is the name of your state (only U.S. law)? Arkansas

My parents are about to finish the mortgage on their home. They have stated numerous times over the years that my sister and I (their only kids) will inherit the house when they both pass.

However, I'm thinking this: When they finish the mortgage, they sell us the land for a dollar, and the remaining $79,999 of the land's worth is made up for in a promise to give them a life estate (again, for a dollar).

The benefits of doing this are so great that I'm surprised no one has thought of it yet.

1. No inheritance tax, since it's a common sale, and not an inheritance. Also, since my sister and I are paying a dollar, there's no gift tax, and the sales tax (if any exists at all) is minimal (we're taxing a dollar, honestly!).
2. If something were to happen to both of my parents before they could write up a will, my sister and I would not have to go through years and years and thousands of dollars on probate to prove that we are the next of kin, because we already owned it in the first place. Also, the will won't have to include the house, since (again) it's already, technically, ours. This will result in less attorney hours writing the will up.
3. My sister and I can sell it any time we want as long as we find a buyer, but even those new owners can't kick my parents out, because it's a LIFE ESTATE! From what I understand, a life estate is the absolute, unalienable right to occupy a piece of land for as long as you want, or until the rest of your life, and the owners, no matter who they are, can kiss your ass. This way, my parents won't get evicted.

So, can you tell me if my logic here is sound before I pitch the idea to my family?

 

[nextwife]

Let your parents keep their own home. There are many potential problems with your plan.

They may wish to relocate someday, maybe get into a smaller place, a warmer climate, a condo, move where their Grandkids are, etc. and take the proceeds of their home. They may want to someday use the money from their home to live on. You don't know the future. There are many reasons they may wish to be able to tap into their home.

Also, if either of you are on title and get sued, their house could be at risk. You are thinking about how this benefits YOU, not what benefits them.

 

[FlyingRon]

Further it can screw their medicaid eligibility. It will be bad for you taxwise (you adopt their 30 year old or whatever basis) on inheritance. The GIFT (and the IRS will consider this a GIFT) is taxed exactly the same way as the inheritance would be.

Selling a property with a life estate on it will be near impossible.

It would be better to get your parents to make a will or trust NOW rather than doing something foolish and irreversable.

Rather than expending your persuasion convincing them to give things to you, convince them to meet with an elder law expert for themselves. I can tell you that they and you would be better served with sound estate planning (trust/will) plus providing planning for later in life (advance medical directives, medical and possible other power of attorneys, etc...).

 

[stebbinsd]

Let your parents keep their own home. There are many potential problems with your plan.

They may wish to relocate someday, maybe get into a smaller place, a warmer climate, a condo, move where their Grandkids are, etc. and take the proceeds of their home. They may want to someday use the money from their home to live on. You don't know the future. There are many reasons they may wish to be able to tap into their home.

No, they have both stated numerous times that they are happy here, and want to retire here (this is the Ozarks, one of the most popular places for retirement in the nation).

Also, if either of you are on title and get sued, their house could be at risk. You are thinking about how this benefits YOU, not what benefits them.

I'm talking about a life estate. The only way they can get evicted without their consent is by government action such as eminent domain.

I'm also thinking about them. I'm releiving them of the land tax responsibility while they still get to have their home. If that's not thinking about them, I don't know what is.

Further it can screw their medicaid eligibility.

They're actually in surprisingly good health for a 40 and 50 year old. Especially considering they both smoke.

It will be bad for you taxwise (you adopt their 30 year old or whatever basis) on inheritance.[/quote]
Again, my sister and I are not inheriting the house; we're buying it.

The GIFT (and the IRS will consider this a GIFT) is taxed exactly the same way as the inheritance would be.

Are you sure? That's funny, because I could have sworn, when my parents sold me my first car, I paid them one dollar, and it was, technically, not a gift because there was a direct transfer of money involved.

Selling a property with a life estate on it will be near impossible.

Not so. See, they actually have five acres of land that they don't need, want, or use (they actually took over my grandmother's mortgage when my grandmother died, so the mortgage is actually in her name, not their's, meaning they have to worry about nothing except foreclosure). They're backyard is essentially full of brush and kudzu due to years of not being used. This is a perfect spot for the new owner to build a house of his own, and put in a driveway to get to his landlocked house.

It would be better to get your parents to make a will or trust NOW rather than doing something foolish and irreversable.

Problem with that:
The mortgage is still in effect, and it's not even in their name. They CAN'T include it in the will (the only reason they were able to take over my grandmother's mortgage is because the bank allowed them to). Add that to the fact that, writing a will will cost almost a thousand dollars, as opposed to about a hundred in filing fees for the deed and title.

Rather than expending your persuasion convincing them to give things to you

I'm giving just as much as I'm getting. By the time their mortgage is paid off, I should have graduated college, have a full-time job, and can afford half of their land taxes. Again, they're not giving anything to me, because they're also getting tax relief out of the deal.

 

[thedoctorisin]

It will be bad for you taxwise (you adopt their 30 year old or whatever basis) on inheritance.

Wouldn't the new basis just be the $1 purchase price?

 

[thedoctorisin]

This is a perfect spot for the new owner to build a house of his own, and put in a driveway to get to his landlocked house.

Why would the new owner build another house for your parents to enjoy as part of their life estate?

 

[stebbinsd]

Why would the new owner build another house for your parents to enjoy as part of their life estate?

I'm not talking about that. See, my parents sell us all five acres, and we give them a life estate for the small quarter-acre or so that their house is actually built on.

The spot that the new owner will be on will not be occupied by my parents' life estate; it will become a seperate real property in and of itself.

 

[Some Random Guy]

You should really talk to an estate planning professional. There are many things that can and will go wrong here.

As mentioned earlier, if you are on the title and YOU get sued or lose your job and get in financial trouble, then your perants could lose their home. Since you don't live there, the house can be taken as part of a judgment against you.

Also, it will affect your property taxes, since you own the house but cannot get any homestead exemption for living there. It will affect their ability to get nursing home care for five years.

And since you were so worried about taxes, do you know about the $3.5M in property that can be currently excluded from federal estate taxes?

 

[FlyingRon]

Again, my sister and I are not inheriting the house; we're buying it.

Are you sure? That's funny, because I could have sworn, when my parents sold me my first car, I paid them one dollar, and it was, technically, not a
gift because there was a direct transfer of money involved.

100% sure. You are not buying it for $1. You are getting a gift. That's how the IRS will see it, I GUARANTEE!

You got away with it for a number of reasons on the car. Primarily, you were just dodging sales tax. Used cars are also typically valued under the gift tax threshold, this is not. The IRS will not let you slide on this one.

Problem with that:
The mortgage is still in effect, and it's not even in their name.

You're changing your story now. You told us it was about to be paid off.

They CAN'T include it in the will (the only reason they were able to take over my grandmother's mortgage is because the bank allowed them to). Add that to the fact that, writing a will will cost almost a thousand dollars, as opposed to about a hundred in filing fees for the deed and title.

You're talking absolute nonsense. The presence of the mortgage has no bearing whatsoever of the property being willed to you, put in a trust, or being sold to you.

Writing a will *WILL* not take a thousand dollars. My wife and I got both wills, two living trusts, power of attorney documents, medical POAs, advance medical directives, all the legwork to retitle the assets into the trust, etc... for only a couple of thousand and that's in Northern Virginia where lawyers are more exensive than where your parents live.

I'm giving just as much as I'm getting. By the time their mortgage is paid , I should have graduated college, have a full-time job, and can afford half of their land taxes. Again, they're not giving anything to me, because they're also getting tax relief out of the deal.

You're logic is deluded by your greed.

 

[FlyingRon]

Wouldn't the new basis just be the $1 purchase price?

That would be even worse, I bet even the parent's basis is more than $1, but the IRS is still going to see through the sham and consider it a gift.

 

[FlyingRon]

I'm not talking about that. See, my parents sell us all five acres, and we give them a life estate for the small quarter-acre or so that their house is actually built on.

The spot that the new owner will be on will not be occupied by my parents' life estate; it will become a seperate real property in and of itself.

You will have to go to the effort of legally subdividing that if it's even possible.
And stop saying "sell". Unless you are going to pay something approximating the actual value of the property IT IS A GIFT.

 

[nextwife]

Additionally, the parents are still very young, and have potentially the otential for a great many more years. Who KNOWS wher life will take them and their Grandkids?

There are zillions of scenarios in which the parents may need to tap into their equity someday. Heck, they could even divorce, and then ONE of them may not be able to stay and utilize the life estate (not sure how family law judges deal with a co-life estate divied up in a divorce, but in reality two divorced people can't share the same residence), but they will no longer have their equity to divide. The "adult" children haven't all even started their careers, who KNOWS where life may take them or their children?

Additionally, if there IS an open mortgage, a transfer can trigger a Due on Transfer clause.

 

[chaotix]

What is the name of your state (only U.S. law)? Arkansas


So, can you tell me if my logic here is sound before I pitch the idea to my family?

Your logic sounds more like a rant... too many variables/scenarios, you need to pitch the idea to specialized attorney/s, (tax, real estate, land, inheritance, etc)