Strategies/ideas/advice on co-ownership situation, etc

[jeromedawg]

Hey all,

I'm seeking some ideas or advice on our current situation and possible best-case scenarios that could come of it. Currently, I'm in a 75/25 joint tenancy with my parents (they own 75% and I own 25%, on paper) on a 3/2 bed condo (1388sq ft) in Orange County we got in 2007 (my wife and I [married in 2010] live here with our toddler and soon-to-be newborn... my parents are up in the Bay Area and retired/financially sound). In reality I/we have paid roughly 16-17% of the 25% since living here. The monthly 'mortgage' amount I'm paying to them is considerably low - we set this number somewhat arbitrarily but it was more my parents originally just wanting to help me save more. I'm thinking it might be time to move away from that, especially as we have saved up considerably per this subsidization. At the moment, if we wanted to, we could pay the remaining amount off to hit the actual 25% ownership... which leads to the next concern of having this financial tie with my parents.

We have been considering relinquishing ownership back to my parents and just continuing to live here perhaps on 'low rent' while saving for a downpayment on a home we might actually want to move into later down the road. Would this be advisable? This would also avoid complications and potential conflicts with my siblings, for whom my parents want to split all properties they own three ways between the three of us.

There is one other option: we could take over my in-laws (not my parents) current mortgage and move into their place. They took the mortgage on their home up in the San Fernando Valley (a single family 3/2 that's probably closer to 2000sq ft) back in 2004... definitely not a good idea as they are now in their 70s and nearing retirement (whether willingly or by force). They refinanced their mortgage several years ago so the payments are much more manageable (I think they pay around $2000k per month) but they were near defaulting at some point. In either case, they've probably paid roughly 50% of it off by now. If we wanted to take over their mortgage and move in, it would only be in one of two situations: 1) once they have retired and are wanting/willing to move into a community-living arrangement or 2) after they have passed.
Another option for them would be to outright sell the place and use the funds to either downsize or fund their short-retirement. But they had previously talked about wanting to "give" us the home - we would be 'inheriting' their subsidized mortgage. Would this be a good idea?

[jeromedawg]

Anybody?

[former player]

I'd start from scratch by thinking about what is suitable in terms of living accommodation for you, your SO and your soon to be two children, given your income, and where you want to be.  Only if that matches up with either your current condo or your parents' house do you then start thinking about keeping your current tangle of property interests.  If it doesn't match up, move out of the condo into where you want to be and sell the condo.

Honestly, I think that if you have been unable to pay even 25% of the mortgage on your current home (I can't think of any other reason why you would pay back less than your fair share other than financial inability) then you are not in a position to be owning any property in what is presumably a HCOL area, let alone thinking about rentals.

Are you saying that your parents were near to defaulting on the mortgage on their own home at a time when you were underpaying on your 25% of your condo?  Do you pay rent to them on the 75% they own?  You appear to have been getting a massive subsidy from them for years when they have had financial issues of their own.

If you think that there are potential inheritance fights with your brothers down the line, I would suggest setting up an arrangement now which removes any sense that any one of you is getting a financial benefit in advance or will be wanting an unequal share when the time comes.

[jeromedawg]

I'd start from scratch by thinking about what is suitable in terms of living accommodation for you, your SO and your soon to be two children, given your income, and where you want to be.  Only if that matches up with either your current condo or your parents' house do you then start thinking about keeping your current tangle of property interests.  If it doesn't match up, move out of the condo into where you want to be and sell the condo.

Honestly, I think that if you have been unable to pay even 25% of the mortgage on your current home (I can't think of any other reason why you would pay back less than your fair share other than financial inability) then you are not in a position to be owning any property in what is presumably a HCOL area, let alone thinking about rentals.

Are you saying that your parents were near to defaulting on the mortgage on their own home at a time when you were underpaying on your 25% of your condo?  Do you pay rent to them on the 75% they own?  You appear to have been getting a massive subsidy from them for years when they have had financial issues of their own.

If you think that there are potential inheritance fights with your brothers down the line, I would suggest setting up an arrangement now which removes any sense that any one of you is getting a financial benefit in advance or will be wanting an unequal share when the time comes.

Thanks for the response. First, wanted to clarify that it's my in-laws in the last paragraph who took a mortgage out late and who have the financial issues; not my parents. We were just considering the option of taking over my in-laws' mortgage in the case that they retire or pass-on and we want to build equity that way (we really haven't built any equity at this point in time). But this would also mean the displacing of my in-laws if they are retired so in that situation we would need to figure out an option for their living situation (perhaps a senior community housing type of thing)

My parents are financially sound and FIREd now (although "retired early" was closer to age 60 but that's besides the point). My parents had enough assets (in the vacation home and their own funds) to basically pay for the condo my wife and I are currently residing in. Of course, that does come with the arrangement that we are receiving financial benefit through subsidization... as far as that being seen as unfair/unequal my parents do understand that and have reminded my brothers of how they have helped each of them financially, in attempts of nipping at the bud. I don't think that's quite enough though and would still probably want to pull out of this to prevent potential conflicts (especially with my sisters-in-law).

As far as being unable to pay the 25% back, we can at least now. It's just that my parents and I agreed on the amount we agreed that I'd pay arbitrarily (this was well before I was married) and never really revisited - it's just a very 'comfortable' amount to pay back but is not based on any sort of term (I think my parents' intention was to just help subsidize the cost so we would have a higher savings rate and eventually be able to buy into a bigger place, etc if we wanted). With the amount of money I've saved, it is certainly possible to pay off the remaining 25% if we so wish to. The question is if we want to go down that road, which it seems may be a bad idea regardless if it means conflict with my siblings.
The other option is to seek to buy out my parents, but we'd have to then come to some other arrangement on us putting out another large downpayment (to get 50%+ ownership) and then repay them the remainder on a set term. But that would only make sense for the long-term IMHO.

So the last option is for my parents just to fully reclaim the place so that we're 'renting' from them again but without any ties of ownership, and we consider looking for perhaps a single family home, etc and take a mortgage out on that ourselves. Yes, OC is a pretty HCOL area so if we wanted to stay here, we most likely wouldn't be able to stay in the city we're in now, Irvine. Since I telecommute, I have the flexibility to move anywhere, so we would really have to think of another city to move to (perhaps Lake Forest?) or even out of state, where it's a little more affordable once we do presumably take a mortgage out.

[jeromedawg]

Anybody?

I've been trying hard to respond, but am finding it very difficult to read.

You might get more responses upon laying it out much more simply and concisely?

Thanks, I'll try to think of how to condense/shorten/summarize it and edit

Updated it - hopefully it's at least a little more concise?

[GoBigRed]

I would personally try to cash out of the 25% ownership and rent from them or find a better, cheaper place to rent.  I would also sort this out prior to making any new investments.   If they want to subsidize the rent while you save for a down payment, that sounds like a great idea for you, maybe not so much for them, but that is a nice gift to you if they are willing to do that.

If your parents were to pass away, things will be very complicated if you own 25% and then the remaining 75% is split between you and your siblings.  It is often much easier to have the trustee of an estate sell and allocate 1/3 of the proceeds of sale to each child.  They may want to talk to an attorney to have proper estate planning put into place if they own several properties.  The attorney could properly advise them on how to carry out their goals to avoid family conflicts.  Even if everyone is on the same page now, these situations have a tendency to bring out the worst in people if the proper documentation is not in place.  From personal experience on this, it took about 2.5 years to sell a home after a relative died because no one could agree on the sale of the house and no one agreed on who had authority to do so.

In terms of taking over your in-laws mortgage and having them rent from you, that seems like a bad idea to me.  If they were to pass, it usually is better to simply inherit the property as you get a stepped-up tax basis at the time of death.  https://bogleheads.org/wiki/Step-up_in_basis

[jeromedawg]

I would personally try to cash out of the 25% ownership and rent from them or find a better, cheaper place to rent.  I would also sort this out prior to making any new investments.   If they want to subsidize the rent while you save for a down payment, that sounds like a great idea for you, maybe not so much for them, but that is a nice gift to you if they are willing to do that.

If your parents were to pass away, things will be very complicated if you own 25% and then the remaining 75% is split between you and your siblings.  It is often much easier to have the trustee of an estate sell and allocate 1/3 of the proceeds of sale to each child.  They may want to talk to an attorney to have proper estate planning put into place if they own several properties.  The attorney could properly advise them on how to carry out their goals to avoid family conflicts.  Even if everyone is on the same page now, these situations have a tendency to bring out the worst in people if the proper documentation is not in place.  From personal experience on this, it took about 2.5 years to sell a home after a relative died because no one could agree on the sale of the house and no one agreed on who had authority to do so.

In terms of taking over your in-laws mortgage and having them rent from you, that seems like a bad idea to me.  If they were to pass, it usually is better to simply inherit the property as you get a stepped-up tax basis at the time of death.  https://bogleheads.org/wiki/Step-up_in_basis

Thanks for the tips. Yea, we are sort of leaning that way... we wouldn't be able to find a cheaper place to rent anywhere nearby at least. That's for sure. But we could find a "better" place for more haha :)

I *think* they would likely continue to subsidize on the rent after we figure things out and what we're paying now monthly wouldn't change... then again, they may change their minds and ask for more. We'll just have to discuss with them what would happen.

I was thinking there would be complications if they passed on and that split exists. So maybe we outta jump on relinquishing full ownership to them asap. I think they have an attorney who they go through for a lot of these kinds of things (they own a couple other properties). But this may all have to come up again when we have the "discussion" with them.

As far as taking over the in-law's mortgage, and given all the current advice, I think it would be for the purpose of moving into their home but this would only apply if they wanted and were willing to relocate themselves to a community living arrangement OR if they passed on. Are you saying that inheriting the property (w/ a mortgage owed on it) would be the better option either way? The thing is, we don't know if they'll want to keep the house themselves especially as their grandkids get older. They may want to move closer to where we are. Other option, if it would make the more sense to go with the inheritance for stepped-up tax basis, is to relocate to their area and find as cheap a rental that we can find near their home. That way they wouldn't feel any pressure to move out and could continue living there... the problem though is once they retire their cashflow stops. I don't know if they'll have enough Social Security $ to cover the mortgage costs...

[GoBigRed]

For your in-laws, it sounds like a lot of this hinges on their retirement plans, which they don't seem to have enough to comfortably retire on.  For them, it sounds as though they may need that equity from a house sale to retire on?

If they intend to continue living in the house until death and would pass the home to you after death, then yes, I personally would not purchase right now.  You would be better off inheriting it because of the stepped-up tax basis.  I say generally, because there are so many factors to consider.  I am also not an estate or tax expert, but this is what I would do.

If they are just being nice and are willing to let you assume the mortgage and are essentially selling the home to you at the existing principal balance (i.e. they get nothing from the sale other than being free from the mortgage), then it may be great for you.  Not so much for them.  You also would have to make proper arrangements to assume the mortgage (not all banks allow this) and change title in your name.  Its not as easy as giving them a mortgage payment to pass along to the bank.   You need to treat it as though it is a sale.  Personally, if this is the route you go, get a new loan in your name.   Otherwise the liability on the mortgage is at the original loan balance, not at the new, much lower loan balance which you mentioned would be 50% of what they paid?

Assuming you purchased the home for essentially the existing loan balance, and then lived in it as a primary home, this does help the analysis since you can exclude gains from sales of a primary home (up to $500k for married).   This would be a nice gift from your in-laws, but I would be concerned that they will run out of money and would need a place to live later on in life (meaning your house).  https://www.law.cornell.edu/cfr/text/26/1.121-1

[jeromedawg]

For your in-laws, it sounds like a lot of this hinges on their retirement plans, which they don't seem to have enough to comfortably retire on.  For them, it sounds as though they may need that equity from a house sale to retire on?

If they intend to continue living in the house until death and would pass the home to you after death, then yes, I personally would not purchase right now.  You would be better off inheriting it because of the stepped-up tax basis.  I say generally, because there are so many factors to consider.  I am also not an estate or tax expert, but this is what I would do.

If they are just being nice and are willing to let you assume the mortgage and are essentially selling the home to you at the existing principal balance (i.e. they get nothing from the sale other than being free from the mortgage), then it may be great for you.  Not so much for them.  You also would have to make proper arrangements to assume the mortgage (not all banks allow this) and change title in your name.  Its not as easy as giving them a mortgage payment to pass along to the bank.   You need to treat it as though it is a sale.  Personally, if this is the route you go, get a new loan in your name.   Otherwise the liability on the mortgage is at the original loan balance, not at the new, much lower loan balance which you mentioned would be 50% of what they paid?

Assuming you purchased the home for essentially the existing loan balance, and then lived in it as a primary home, this does help the analysis since you can exclude gains from sales of a primary home (up to $500k for married).   This would be a nice gift from your in-laws, but I would be concerned that they will run out of money and would need a place to live later on in life (meaning your house).  https://www.law.cornell.edu/cfr/text/26/1.121-1

Yea, we're trying to figure out what would be 'sustainable' for them once they finally retire. I think they're pushing back on it as much as they can because they know they owe on the mortgage and are somewhat in denial that there will be a point in time that they simply won't be able to function enough to run a restaurant, whether one or both of them are in that state of mind. Sadly, they probably will have to walk away from their business as it seems unlikely anyone would buy it off their hands.

I'm not sure if they want to keep living in the house but as of late they've been renting two of the three rooms out to tenants which makes up for more than half of the mortgage I'm pretty sure. It's conceivable that, if they maintain renting out those rooms even through retirement, that they'd be able to sustain living there on social security, etc until something drastic happens or they are forced to an assisted living situation. The other problem is that we're over an hour away from them, and making the trek up there (or them making the trek down here) isn't the most desirable - they would probably prefer to be close to us in the case of retiring. In that case, the option of us moving up their way is still a thought but I definitely like where we live more than I would living up there - that's for sure.
The case of them having us assume mortgage would be if they moved out to low-income housing or something but this would probably be a less-desirable option for them yes.

So what you're saying, for a probable best-case scenario on both sides is just to inherit the property after they pass on and benefit from a stepped-up tax basis (is this more or less beneficial than assuming their mortgage/taking a new loan?). The best-case scenario for themselves would probably be to just sell the place and retire on that equity. And the best-case scenario for us (and especially not them but possibly the inverse) would be to assume the mortgage and take a new loan out against it.

BTW: for the whole situation with them passing away and the home becoming an inheritance and us benefiting from the stepped-up tax basis - are there any considerations we would need to take if A) they still owe mortgage on it AND B) they are unable to live in the home for a remainder of their retirement years due to health or other reasons that require them to either be hospitalized or moved into assisted living. That might present some level of risk where now we have to help them make their mortgage payments no? Unless we help them rent out the home full-time to some tenants?

[robartsd]

Since it doesn't sound like long-term you and your wife do not desire to live in either the condo or your in-law's home, help your in-laws plan their retirement, untangle the condo situation, and plan for your future home as three separate problems.

If the condo is worth more than it did when you bought it, selling would create capital gains for your parents since it has not been their primary home in 2 of the last 5 years. If your parents passed away, you'd inherit 1/3 of their 3/4 share to have 1/2 of the condo and each of your siblings would own 1/4. Perhaps at that point you'd be able to cash out refinance and buy out their shares, or perhaps you could exchange your share of other inherited property for their share of the condo. I think you should at least catch up to your 25% ownership ASAP. You'd still be subsidized by your parents in that you have full use of the condo while they own 75% of it. Your siblings may see this as "unfair" (do your parents subsidize them in other ways?). This situation is sticky and can only be untangled by discussion with your parents and siblings; discussion on this thread won't help much.

Your in-laws can continue living in their house, renting rooms and/or taking out a reverse mortgage for income. Or they can sell the house and downsize (either renting or purchasing) to access their equity. When they do pass, if they still own the home, you can choose to pay off the mortgage by selling, refinancing in your name, or paying cash; but if you do not envision living in the home after they pass, do let them know so that they do not hold on to the house just so you can inherit and dispose of it.

[jeromedawg]

Since it doesn't sound like long-term you and your wife do not desire to live in either the condo or your in-law's home, help your in-laws plan their retirement, untangle the condo situation, and plan for your future home as three separate problems.

If the condo is worth more than it did when you bought it, selling would create capital gains for your parents since it has not been their primary home in 2 of the last 5 years. If your parents passed away, you'd inherit 1/3 of their 3/4 share to have 1/2 of the condo and each of your siblings would own 1/4. Perhaps at that point you'd be able to cash out refinance and buy out their shares, or perhaps you could exchange your share of other inherited property for their share of the condo. I think you should at least catch up to your 25% ownership ASAP. You'd still be subsidized by your parents in that you have full use of the condo while they own 75% of it. Your siblings may see this as "unfair" (do your parents subsidize them in other ways?). This situation is sticky and can only be untangled by discussion with your parents and siblings; discussion on this thread won't help much.

Your in-laws can continue living in their house, renting rooms and/or taking out a reverse mortgage for income. Or they can sell the house and downsize (either renting or purchasing) to access their equity. When they do pass, if they still own the home, you can choose to pay off the mortgage by selling, refinancing in your name, or paying cash; but if you do not envision living in the home after they pass, do let them know so that they do not hold on to the house just so you can inherit and dispose of it.

We *may* consider living in their home but that's not the first option. We may want to see about holding onto it for rental/investment purposes though. The other tricky thing is how, if at all, my brother-in-law will be involved if we do decide we want to keep the home - he may want a piece of that.

I think we're either at the breakeven point or have surpassed in the value of the condo. They definitely don't want to incur more gains by selling it as they already have a lot of passive income coming in from other sources (and my mom is maxing out the $40k income limit in 'retirement' by continuing to contract with the school district for 'odd jobs'). But yep, assuming our 25%/75% split and then the inheritance we would end up owning half the condo if they passed on. We actually discussed this with my brothers a couple years ago and they seemed fine with it. As far as my parents subsidizing my brothers in other ways, they certainly have and do: free babysitting/childcare since they're both up in the Bay Area (and my 2nd oldest brother is a minute walk from my parents), my 2nd oldest brother was living at home, in a rental condo and in a rental house of theirs for pretty much FREE his entire adulthood that he lived there, my oldest brother they helped finance him on his first home and I'm sure there's more. I guess we're just trying to figure out if it's better to have a larger stake in the property now and in the future of the inheritance for this property in particular, or if it's better just to relinquish and "cash out" our partial ownership.

Thanks for the reminder on the reverse mortgage - that might be something worth looking into. Their other dilemma is that they would [naturally] want to file low-income given the lack of resources but I'm assuming they can't do this as they own a home, and even if they sold it the proceeds would probably push them over the limit on being "low-income" - what I am interested to know is if we were to assume their mortgage (if it's even possible), would they at that point be able to qualify as low-income?

[jeromedawg]

There's one important piece I failed to mention that will probably change many things regarding the situation with my in-laws and their home: my brother-in-law. We haven't spoken to him about any of this but he is on the inheritance and trust (actually, he is the first successor trustee and my wife is the second successor trustee - doesn't this mean he has "first dibs" of control on *everything*? If that's the case, my wife needs to talk to her parents because I think they intended to make them co-trustees... again, not sure if that's any different). But in either case, having him around complicates all of this. It might be better just allowing the place to pass into inheritance after they pass-on OR they downsize or sell the place for the equity in cash for retirement and live in low-income housing. This all gets complicated of course with their lack of desire to "retire" - if anything along any of these lines actually happens (besides them passing on), it will likely be because of a "come to Jesus" moment OR a catastrophic event in their lives.

[GoBigRed]

I don't believe the advice that everyone gave above really changes. 

If the brother-in-law is the trustee, that does not mean he gets the house/first dibs.  In fact, many people select banks as trustees who do not receive anything in the estate.  Most often, one of the beneficiaries is also the trustee.  The trustee is simply in charge of the estate after death and must act on behalf of the beneficiaries.   

It all depends on what the trust documents and will state as to who would receive the house.  More often than not, it simply states that the named beneficiaries receive equal shares of the estate.  The trustee would likely liquidate the estate (including selling the house) and you would share the proceeds.  This can take some time when family complications and disagreements arise.  Most likely, your your wife and brother-in-law are the two named beneficiaries and they would split everything equally.  There may be some document that lists certain personal items or assets as going to specific people, but often times this does not exist.

If you want the house after the passing, that needs to be specifically stated in the will/trust documents and would recommend that the parents discuss with their attorney to make sure it is documented properly to meet everyone's goals.

[jeromedawg]

I don't believe the advice that everyone gave above really changes. 

If the brother-in-law is the trustee, that does not mean he gets the house/first dibs.  In fact, many people select banks as trustees who do not receive anything in the estate.  Most often, one of the beneficiaries is also the trustee.  The trustee is simply in charge of the estate after death and must act on behalf of the beneficiaries.   

It all depends on what the trust documents and will state as to who would receive the house.  More often than not, it simply states that the named beneficiaries receive equal shares of the estate.  The trustee would likely liquidate the estate (including selling the house) and you would share the proceeds.  This can take some time when family complications and disagreements arise.  Most likely, your your wife and brother-in-law are the two named beneficiaries and they would split everything equally.  There may be some document that lists certain personal items or assets as going to specific people, but often times this does not exist.

If you want the house after the passing, that needs to be specifically stated in the will/trust documents and would recommend that the parents discuss with their attorney to make sure it is documented properly to meet everyone's goals.

So "first successor trustee" vs "second successor trustee" has no bearing on who has priority as the trustee (similar to beneficiaries and contingent beneficiaries)?

With BIL in the picture, us wanting the house probably diminishes. We would likely tend to lean towards just liquidating assets and splitting 50/50. That said, they gave us a copy of their revocable trust. Don't they need a will too? Also, they supposedly have durable power of attorney (which I assume is for who makes decisions for their healthcare if something happens to one or both of them where they cannot make decisions on their own, etc) but we haven't seen any paperwork for this. EDIT: NM i was wrong - we scanned a copy of their will and HC directives as well. So I think they're covered. We just have to review what's in the will/trust. I think everything is a 50/50 split

[GoBigRed]

The "trustee" and "beneficiary" are two different terms.  The beneficiaries are the people entitled to the assets of the trust.  The trustees administer the trust/estate.  There is likely a designation of 1st trustee/2nd trustee to account for a situation in which the first is unable to act in that capacity (death, illness or whatever it may be).

Typically there is still a will(s) associated with the trust, and most likely punts to the trust.  One of the reasons, among many other reasons, people do trusts is so their will does not become a matter of public record.  Typically trusts are not after death.  So even if a will exists (there would most likely be two separate wills - father and mother), it most likely punts to the trust documents or grants everything that is not otherwise in the trust's name to the trust. But that is state specific.  They likely already had an attorney put this together, but may be worth discussing if not and if things are missing.

I think you should just discuss the situation with the parents.   

[jeromedawg]

The "trustee" and "beneficiary" are two different terms.  The beneficiaries are the people entitled to the assets of the trust.  The trustees administer the trust/estate.  There is likely a designation of 1st trustee/2nd trustee to account for a situation in which the first is unable to act in that capacity (death, illness or whatever it may be).

Typically there is still a will(s) associated with the trust, and most likely punts to the trust.  One of the reasons, among many other reasons, people do trusts is so their will does not become a matter of public record.  Typically trusts are not after death.  So even if a will exists (there would most likely be two separate wills - father and mother), it most likely punts to the trust documents or grants everything that is not otherwise in the trust's name to the trust. But that is state specific.  They likely already had an attorney put this together, but may be worth discussing if not and if things are missing.

I think you should just discuss the situation with the parents.   

Thanks for the clarification. Yea, we're looking over the will and trust now. On a side note: we also found that they own (or possibly co-own) a parcel of undeveloped land out in the middle of nowhere that they bought as an 'investment' - not sure what we're gonna do with that...

We plan on discussing this more with them but I don't even know if they fully understand things - they had a shady lawyer draft things up for them... I say shady because he got in trouble and was suspended for 30 days a couple years ago (actually *right before* he helped them draft their documents). This is somewhat concerning too because he got in trouble for the following things: "Improperly accepted payment for representing client from someone other than the client, Never spoke with client, Bankruptcy petition filed by Dave was missing required schedules and statements, Committed acts involving moral turpitude, dishonesty or corruption" - would it be a good thing to have them use a different lawyer moving forward and to also get their documents reviewed again to make sure everything is prudent?

[GoBigRed]

If it was my parents, I would go to another firm or attorney that specializes in estate/wills/trust law given the reputation you have described of the previous attorney.  If for nothing else, just for peace of mind.  I recommend being as organized as possible when you consult.  The less organized, the more it will cost your parents. 

Check with the local bar association and they may have some referrals.   Most likely the attorney will redo everything and use their standard form documents (often cheaper than trying to revise a bad form).  They may review and determine that the documents are fine, but hard to tell.  Not sure how much things cost in California, but it costs money to do this and could be a few thousand dollars, or could be much less.  It saves you time, money and hassle down the road though in the event the documents were not done properly.