Estate Plan Helps With Real Estate Decisions

Q: My mother owns a home and a triplex unit in California. Both are worth somewhere around $1 million each.
 

She lives in the home. The properties are in a living trust in her name.

My brother and I will inherit the properties when my mom dies. My brother would like to live in her house and make repairs to it. But he won’t make the repairs with his money unless the home is in his name.

He is worried that my mom's possible medical problems would cause the house to be lost and all of the money he would have put into it. My mother could move out of the house and into a triplex unit to help my brother.

If she sold the triplex, we think she would have to pay capital gain taxes on it since she never lived there. If she gave the house to my brother, he would have to pay a hefty inheritance tax. We don't know the law about taxes and real estate and inheritance, and so are at a loss as to what to do.

The goals are to get my mother out from under taking care of a large house and make her life easier and simpler. We also want my brother to have the house and make repairs to it. What advice can you give us?

A: Your mother needs the help of a good estate planner. There is significant money at stake and she needs to ensure that her estate is properly set up.

If your brother wasn’t in the picture, your mother could sell her home – if she lived in it for the two of the last five years – and exclude up to $250,000 of the profits from tax(if she were married, she could exclude $500,000). If the property has profits in excess of these amounts, the balance would be taxed as capital gains at a rate of about 15%.

If she decided to hold on to the home and sell the triplex and she has owed the triplex for more than one year, any profits from the sale of that property would be taxed as capital gains at a rate of about 15%.

But working with an estate planner can ensure that your mother’s wishes and needs are met.

If your mother will face significant medical expenses, she’ll need cash to pay those expenses. If you and your brother expect governmental agencies to pick up the cost of a nursing home, you may find that the transfer of the home or other of your mom’s assets at this time to other family members may cause you a great deal of trouble.

Most states have laws that prohibit people from receiving state aid if they have given away assets that could have been used to pay for her medical expenses. A judge can unwind a financial transfer of assets that occurred within 3 to 5 years of her requesting state aid.

If your brother were to buy the house from your mom and pay her the market value of the home, he’d be able to own the home and make whatever repairs he wants.

However, he’d either have to finance the purchase himself or he’d have to convince your mom to finance the purchase for him. If she were to finance the purchase, she would have to receive monthly mortgage payments from him. The house would then be his and her medical needs should not impact that transaction.

This sounds like a great solution, however, if the home has increase substantially in value and your mom owe at least some capital gains tax, she needs to receive enough cash to cover the tax bill. Where would the cash come from?

Also, keep in mind that if your mom were to die, if the value of her estate is less than the amount that would trigger an estate tax, the home and the triplex will be inherited by you and your brother without having to pay federal income taxes. As of January, 2006, that amount rises to $2 million.

Besides, when you inherit real estate and later sell it, the cost value to you for federal income tax purposes is the value of the home at the time you inherited the property. If you turn around and sell it a few months later and there is a profit, that sale price may even be considered the true inherited value of the property.

Thus if the properties each have a value of $1 million each and you inherited them today and sold them each for $1 million tomorrow, you would not have any taxes to pay the Internal Revenue Service.

It’s complicated because there are state tax issues, and you obviously want your mom to live a long time.

The good news is that your mother has enough assets to help take care of her in her old age, and she will never be a financial burden to you and your brother. A good estate planner or estate attorney can sit down with the three of you and help figure out a solution to these issues.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com