Author Topic: Splitting home equity between siblings - what's the principle? (No pun intended)  (Read 3351 times)

FFF

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My apologies if this has been covered elsewhere in the forum but my searching hasn't come up with a suitable answer...yet!

My wife and her sister both have their family home in their names and it is intended by their parents to have an equal share of the value in the house. The house is completely paid off with nothing still owing on it. Pretty straightforward so far I know you are thinking, but my wife's sister has previously put money into the house to assist in paying it off. Due to other life reasons it has now come to the point where the house will be sold soon and I wanted some advice on how to split the equity fairly so as to avoid any disagreements down the track.

To keep the numbers simple let's say the house is worth $400k after selling, taxes etc. Unfortunately I don't have the exact figures behind the amount her sister put in, when and the value of the house at the time. But for simplicity's sake let's say she put in $10k and that would now be currently worth $20k. So my question how do they split the equity to accommodate this $20k?

Does the sister get her $20k back straight away and then they split the remaining $380k evenly at $190k each?
Or split evenly at $200k each and then my wife pays her sister $20k to split it $180k/$220k?
Or none of the above and work it out based on percentages-which unfortunately requires knowing the values at time of investment etc.?

To be honest I think I can see the arguments for both ways but I've gone over this in my head too much that I now can't decide what the fairest option is. The values are not going to make any difference really to my wife and I either way but we just want to make sure that things are being done correctly to all parties.

rafiki

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I would use the first method you describe. Almost treat it as if there was a third party claim to the house of 20k. E.g., say there was a small $20k mortgage or lien on the house: That would need to be satisfied first and paid off the top. The remaining net proceeds would then be split between the parties.

FFF

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Thanks rafiki, that confirms what my instinct told me straight off but then I over thought the issue and confused myself!

Another way I just thought of to look at it was to say what if the house was only worth $20k now. Obviously you would pay off the outstanding debt first and then there would be no equity left to split. You certainly wouldn't split it $10k/$10k and then have one pay the other $20k for a -$10k/$30k split.

Thanks again for your help

Fruglette

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Agreed.  I would treat the sister's contribution as a loan to the parents, so pay that off first, and then split the remainder 50/50.  If the parents had intended for the sister's contribution to alter the "ownership" balance, they could have specified that in the will, by saying something like that the house should be split 45/55 or 40/60.  But they left the house to them equally, and after paying back the sister (and treating her contribution with generosity in terms of recognizing that $10k would be worth $20k now) they still own it 50/50.....

That said, don't be surprised if the sister has different assumptions.  As you say, there are lots of ways to think about it, and arguments for a variety of calculations.  We all tend to gravitate to the versions that benefit us, so she may be leaning a different way.  Don't see this as "greedy" but instead as reasonably human, and stay willing to talk it through, even when you don't instantly agree.  Inheritance issues so often damage relationships - even good ones.  So you're smart to be thoughtful and open about it to try to avoid people getting dug in and hurting each other.

hope2retire

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To be fair do it like this, so it will not look like one took advantage of the other and No sour taste remains...

10k+ simple interest at the interest rate(say 4%) that the house was mortgaged, for the number of years after she contributed 20k, say 10yrs.
10,000*(1+0.04*10) = 14,000

pay off 14,000 and then 50/50

the reason it is 10K is, each daughter is responsible for 10K of their parents debt before claiming 50/50 stake on the house.




« Last Edit: June 03, 2015, 01:07:50 PM by hope2retire »

Capsu78

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To be fair do it like this, so it will not look like one took advantage of the other and No sour taste remains...

10k+ simple interest at the interest rate(say 4%) that the house was mortgaged, for the number of years after she contributed 20k, say 10yrs.
10,000*(1+0.04*10) = 14,000

pay off 14,000 and then 50/50

the reason it is 10K is, each daughter is responsible for 10K of their parents debt before claiming 50/50 stake on the house.

^^^ This would be my starting point as well:  distinguish if the money was intended as a loan or as an "investment".  The intent of the will sounds like a 50/50 split.  She deserves to get money and "interest" back.  She may feel different but you are standing on firm logic here.  As the father of 2 daughters who has his will structured exactly like this, I would have had a family meeting on this topic back before I accepted the loan. 
My wife's sister and husband moved in to care for their mother for the last 5 years of her life- rent free, cashing in the equity on their existing home and then adding an addition that was never discussed among the siblings before ground broke.  While we officially "didn't care" if any money was left when her Mom died, just the fact that her sister made the whole house a rubberband ball of finances without consulting any other sibling until it was too late left a very bad taste in each of the other siblings that exists to this day.  I would not want that for my daughters who have a great relationship. 

FreeAsADragon

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Does the sister get her $20k back straight away and then they split the remaining $380k evenly at $190k each?
Or split evenly at $200k each and then my wife pays her sister $20k to split it $180k/$220k?

Just wanted to point out that both methods lead to the same amount:
- in the former case, the sister gets a total of $210k and your wife, $190k.
- in the latter case, they split evenly at $200k each. Then, *each of them* gives back 50% of what is totally owed on the house ($20k) to the person whom it's owed to (the sister). So your wife gives your sister $10k, and your sister gives herself $10k. Again, the sister ends up with $210k, and your wife, $190k.

In the latter case, the error you were making is, making your wife pay the entire amount of $20k owed, while she is only liable for her half of it.

Runrooster

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As the father of 2 daughters who has his will structured exactly like this, I would have had a family meeting on this topic back before I accepted the loan. 
My wife's sister and husband moved in to care for their mother for the last 5 years of her life- rent free, cashing in the equity on their existing home and then adding an addition that was never discussed among the siblings before ground broke.  While we officially "didn't care" if any money was left when her Mom died, just the fact that her sister made the whole house a rubberband ball of finances without consulting any other sibling until it was too late left a very bad taste in each of the other siblings that exists to this day.  I would not want that for my daughters who have a great relationship.

I don't want to derail the thread but it feels like all the bases have been covered for the original.  I'm trying to understand the issue of a family meeting and why your in-laws needed to get you/your wife's permission?  I'm in basically your wife's sister's position - I'm giving up my freedom to care for my mother, and there have been informal understanding I will get whatever is left (if anything) of house equity.  I know my parents haven't cleared this with my siblings, all of whom are upper middle class and don't need an inheritance, but do "expect" one.  But is it my job to deal with what my siblings think is owed?  I don't know how I would do that while my parents are alive any better than after death.  I resent the "rent free" - having a live-in caregiver is a benefit to them more than to me, because then I'm on duty all hours.  I come from a culture where the eldest child is expected to take in the parents - whether that means they never move out of the family home, or they build an addition onto their own home for the parents to move in.  I'm the youngest, and none of the older kids had any interest in upending their own lives to be caregivers, so I'm baffled that you resent not being included in the arrangements.  Whether your inlaws chose your SIL or she was the only one who offered, your inlaws made the house a rubberband of finances.  But I guess you can't be angry at the dead, so you're angry at her?
« Last Edit: June 03, 2015, 02:22:20 PM by Runrooster »

Capsu78

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RunRooster,
I am not angry at all- just telling a cautionary tale that "4th quarter" life arrangements can destabilize life long family bonds.  My and DW experiences include the loss of all of our parents so please do not take offense at my quickly written summary of my observations of the DW's family dynamics.
I fully understand the caregivers perspectives and do not wish to minimize them- in fact in my family, the live in caregiver was gifted the house- as was my parents wishes.  And when it comes time for the possibility that one or the other of my daughters has to caregive for my wife or myself, I would hope that it is done out of love and nothing more.  Certainly the CG will be recognized for their efforts in the final accounting- I just would hope that we will have the mental capacity to be a part of the discussion and decision.  (PS the one who CG's crabby old me will get a bigger "gift" than if my wife outlives me!   I tell my SIL's that I'm going with whoever has the better cable package...)
I have just seen too many strong families siblings lose all contact with each other after the estate is distributed...and others on here in different threads have experienced much worse.   
« Last Edit: June 03, 2015, 02:47:54 PM by Capsu78 »

Runrooster

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I suspect that many of these bonds were never very stable.  I have one sibling who spent decades being angry that I was allowed to go to a fancy private college while she paid her way through state school.  But, 1. I got in where no one else did and 2. I still took out loans, lived cheaply, blah blah, 3. my parents have loaned/given her money when she needed it including a very nice wedding.  I expect her to  be upset when I get the house (even though she knows how much work it is to CG), and I expect to give her the middle finger.  I'm cordial with her right now, because it makes Mom happy.