Safeguarding proceeds from parents home sale

[forummm]

My parents are bad with money and don't trust each other (and hate each other). Their home is their only significant asset (~half million equity). I'm trying to help them downsize so they can get a place without a mortgage. But my mom doesn't trust my dad to not touch the proceeds from the sale before they can be applied to the new house. She's not irrational in her fear. They have bad credit (bankruptcy, although it's more than 7 years ago now) and don't want a mortgage, even temporarily on a new place. The idea is to use the cash from the current home to pay cash for a new home. And some of the cash needs to be reserved to pay a tax bill as well.

What are some options to ensure that the money from the current home safely makes its way to the new house (and some to the IRS)?

My ideas so far:

Do the closings at the same time, or within a short period of time, at the same closing attorney. But this seems a little challenging to pull off. What if they take awhile to find a place they like? And the seller of the new home often picks the closing attorney.

Have the proceeds wired to my checking account. Then I'll wire them to the closing attorney when they are ready to close. And pay the IRS directly as well. This is a bit awkward and will upset my dad. But my mom will be happy with it.

Any other thoughts? Thanks!

[Brystheguy]

Wouldn't the wire to your account count as a gift and be taxed? That would be my concern. Can it not go into an escrow account of some type where they both have to sign off on the withdrawal?

[Omy]

Have the title attorney from their sale hold the proceeds in escrow until their purchase is complete. Their title company can easily make the wire transfer to another title company.

[forummm]

Wouldn't the wire to your account count as a gift and be taxed? That would be my concern. Can it not go into an escrow account of some type where they both have to sign off on the withdrawal?

They won't come anywhere close to the lifetime gift tax exemption (~$28 million) so they would never have to pay gift tax. But technically it would be an undermarket (0% interest) loan, and the amount of interest not paid would be less than the annual gift exemption, so they wouldn't even need to file a gift report.

[GilesMM]

If they don't trust and hate each other as you say, perhaps downsizing is not their first order of business? 

[forummm]

If they don't trust and hate each other as you say, perhaps downsizing is not their first order of business?

Religion often causes people to make poor life decisions, and to persist in them.

[Dictionary Time]

They can get a joint account that requires both signatures for withdrawal, that would get you out of the middle of it.

[forummm]

They can get a joint account that requires both signatures for withdrawal, that would get you out of the middle of it.

Is this a common thing that major banks like Wells Fargo offer?

[forummm]

Have the title attorney from their sale hold the proceeds in escrow until their purchase is complete. Their title company can easily make the wire transfer to another title company.

The title company or closing attorney would be fine with holding on to extra cash for perhaps months? Is that a common service they provide? I just wonder if they would prefer not to deal with the hassle and/or liability of holding onto funds.

[Dictionary Time]

They can get a joint account that requires both signatures for withdrawal, that would get you out of the middle of it.

Is this a common thing that major banks like Wells Fargo offer?

Yes, it’s just how you hold the account. Joe and Mary means they both have to countersign. Joe or Mary mean either one can sign.

[Omy]

Have the title attorney from their sale hold the proceeds in escrow until their purchase is complete. Their title company can easily make the wire transfer to another title company.

The title company or closing attorney would be fine with holding on to extra cash for perhaps months? Is that a common service they provide? I just wonder if they would prefer not to deal with the hassle and/or liability of holding onto funds.

Yes. Call around and make sure, but that is a service most of them provide.

[ixtap]

If you have a good idea of the tax bill, go ahead and pay it.

[six-car-habit]

 Living in a shared rental wouldn't entail having a mortgage....

  Maybe they could sell house, have the closing agent / title company split and forward the equity-  with directions to send 1/2 of it to her private account and 1/2 of it to his private account.

  Then live in a rental together for a year, assess during that time, and see if they want to still be together, without the " future house" binding them together ?

  If they hate each other, this could give them more impetus to split, surely god doesn't want them being miserable in perpetuity {?}

[FlytilFIRE]

Be careful with the joint account idea. Banks in my area may not do a reasonable job of ensuring the signatures are accurate. It's not a stretch to see one person forging a signature. The remedy would be to file fraud charges, etc. Not where I'd want to go.

[MrGreen]

Be careful with the joint account idea. Banks in my area may not do a reasonable job of ensuring the signatures are accurate. It's not a stretch to see one person forging a signature. The remedy would be to file fraud charges, etc. Not where I'd want to go.

Yeah, if your parents trust you I'd almost be tempted to open a new account in your name just for their money and let it set until the purchase of the next house. If this is their only asset and your dad manages to get his hands on the money, well that's all she wrote!

[forummm]

Living in a shared rental wouldn't entail having a mortgage....

  Maybe they could sell house, have the closing agent / title company split and forward the equity-  with directions to send 1/2 of it to her private account and 1/2 of it to his private account.

  Then live in a rental together for a year, assess during that time, and see if they want to still be together, without the " future house" binding them together ?

  If they hate each other, this could give them more impetus to split, surely god doesn't want them being miserable in perpetuity {?}

Interesting idea. If the proceeds are invested (in a way where they can't touch the money*) and then something like a 4% SWR (with inflation adjustment, assuming rents rise with CPI) is used for rent, they probably will have to go with a less nice property. And may not have an asset to leave behind (or sell if needed to live on). I don't care about getting anything from them, and don't need it and wouldn't take it, but my siblings are zero net worth types, and they could use it. But that's secondary consideration for me vs my parents being OK.

*My mom is supposed to be getting something from her mom who just passed. And she is planning to give me the money (to keep it safe) to invest for her and then send them a monthly payment for living expenses. My dad doesn't know about this yet and will be upset of course. He wants to spend the money as he pleases, and has been dreaming of it for years. And it will be an ego hit as well. But I'm sure she'd be happy for me to do that with her half in the above scenario. Maybe he would agree to have me take care of his half eventually too. She wouldn't accept a scenario where he manages his half, because she couldn't rely on it still being there to pay rent from (or fund another house purchase) eventually.

I wonder if they will split up just as a result of the inheritance management. I don't know why they are together anyway.

[Catbert]

Be careful with the joint account idea. Banks in my area may not do a reasonable job of ensuring the signatures are accurate. It's not a stretch to see one person forging a signature. The remedy would be to file fraud charges, etc. Not where I'd want to go.

That's exactly what I'd be worried about.  These days checks are generally processed unseen by human eyes so any scribble would serve the computer. 

[Villanelle]

The issue with each of them taking half and renting is that dad could blow through his half, and then what?  That solution seems to have the same potential for disaster as selling the house and having dad hold on to half while they shop for a new place to buy.  If he can't be trusted not to blow the money in that scenario, he can't be trusted not to blow it in the rent scenario.  (In fact, the rent scenario is probably worse because he has to not-spend the money for a longer time.) I know you said invested "in a way they can't touch the money", but just make sure that's iron-clad. 

And also consider what happens if dad blows his 4% disbursements on hookers and blow and then mom is in a bind when it comes to paying property taxes (or rent), utilities, maintenance, etc.  If you go this route, you might want to have much of their 4% allotment sent to some sort of untouchable account (perhaps directly to you) so you can pay the necessities, if you are up for being that hands on.  Dad can't blow the property tax money and the roof replacement sinking fund and the money for electricity if it goes directly to you. But you may also not want to be that hands-on, and deal with the almost inevitable whining and frustration that will happen when you are mean and won't give someone what they want. 

If they decide to dissolve the marriage, what happens to the split funds?  It might be worth consulting an attorney about this.  Mom's inheritance might be okay (depending on your state's rules) since it sounds like she will keep that completely separate.  She just needs to ensure she doesn't accidentally co-mingle funds, so the best bet would be that the account stays as the inheritance and only the inheritance, with no future deposits.  But if they sell the house and each take half and dad blows his, mom's account may still be community property, so dad could be entitled to half of her half when his half is gone. 

[forummm]

If they decide to dissolve the marriage, what happens to the split funds?  It might be worth consulting an attorney about this.  Mom's inheritance might be okay (depending on your state's rules) since it sounds like she will keep that completely separate.  She just needs to ensure she doesn't accidentally co-mingle funds, so the best bet would be that the account stays as the inheritance and only the inheritance, with no future deposits.  But if they sell the house and each take half and dad blows his, mom's account may still be community property, so dad could be entitled to half of her half when his half is gone.

They're in AZ, a community property state. So I assume that the separate accounts idea would lead to half of whatever is in the separate accounts belongs to the other person. So if he blows through his half, then he gets half of hers too.

My understanding is that the inheritance is separate property and stays hers if it's in a separate account. And she's actually going to put it in my account so it's technically a gift to me (she'll never get anywhere near the lifetime gift exemption--this is the only money she has to give) from her separate property.

The "where they can't touch the money" implementation would be that it's in my account, invested, and with monthly disbursements back to them to pay for their expenses. The same thing I'll be doing with her inheritance funds when she's ready to begin the payments.

I'd prefer not to be that hands on or deal with whining. But it's better than having them left with nothing.

[bacchi]

My understanding is that the inheritance is separate property and stays hers if it's in a separate account. And she's actually going to put it in my account so it's technically a gift to me (she'll never get anywhere near the lifetime gift exemption--this is the only money she has to give) from her separate property.

Your mom would then have to file Form 709 to declare the gift.

She could disclaim some or all of her inheritance and it might legally fall to you, depending on the will.

[forummm]

Your mom would then have to file Form 709 to declare the gift.

Yes. Fortunately, it's only 1 page.