Author Topic: Advice sought - in-laws wanting to retire soon and pass on the 'inheritance'  (Read 4176 times)

jeromedawg

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Hey all,

So my in-laws started talking to my wife and my bil about how they're getting old and don't want to work much longer, and how they need to enjoy their lives while they can blah blah blah. They're in their 70s now and I have no idea if anything their saying holds much weight because they've talked about this previously but have never taken any proactive steps and it feels like there's no end in sight. Since having our kid though, they do seem to have lost more interest in running their business (Chinese restaurant in a not-so-great area).

Anyway, I'm seeking some advice on options they can take to downsize their lives and reduce their tax liability. They are throwing around a lot of potential ideas and options right now but there are a few that stand out.  I'll try to summarize it in a list...:

1) They are wanting to sell the restaurant within the next 2-3 years but if they can't they are talking about walking away from it completely. I'm not sure how much it could be worth but I would have to guess $200-$500k roughly. This is just a mere guess on my part - I have no idea how to properly assess the valuation of a restaurant business that hasn't been doing all that well for the past decade. The big issue here is that they're renting the [large] restaurant space from a landlord. Things would be so much better if they owned it of course, but that's not the case.

2) They currently are in a 30 year mortgage term on their 3 bed/2 bath house - they bought in 2004 and nearly defaulted on it several years back until they got their interest rates and payments lowered through a mortgage remodification. The home I think was around $525k when they bought and they modified probably down to around $400k or in that ballpark during the downturn. The home is probably worth around $550k my wife thinks.

3) They probably are sitting on around 40k in savings and not sure what in cash. "Investing" is both a foreign concept as well as one that evokes fear in them. It's pretty ridiculous they think this way because it's not like they have a ton of money to begin with. Either way, they are full of fear and paranoia when it comes down to this stuff.

4) They are talking about starting to gift my wife and my bil the maximum $14k each year to offload their assets and minimize tax liability. Their goal is to eventually shift all assets to us. But my wife and bil want to put that gifted money into an account that's for them (perhaps in the future to pay for medical bills, hospital visits/stays, hospice care, etc). They also want to downsize their home - they want to sell the current house and then let us "borrow" their money to buy a smaller condo for them to live in that would be under our names and not theirs. This way they'd qualify for Medi-Cal among other things. Currently they receive SS money and are on Medi-Care. This would all go hand-in-hand with them either selling the restaurant or walking away from it. I think they're thinking they could primarily live off the SS money and whatever remaining assets they have.

I might be missing some other important figures/points but that's what I've got off the top of my head. For starters, are there any suggestions on the best approach to their downsizing/retirement goals? We're feeling the burden since they're talking about us taking on all the gift money as well as helping them downsize to a smaller condo.... I don't know the first place to begin processing all of this but the sense of urgency is definitely growing.
« Last Edit: August 18, 2016, 05:42:19 PM by jplee3 »

Trinitysmom

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i don't think there is a lot you can do at the moment, your in laws need to get the business and the house appraised. I don't know what the restaurant market is like where you are but I can't see anyone paying anything close to $200 000 for a struggling restaurant. It just wouldn't be viable. Have you looked at the cost of condos where they would like to live? Could they afford one? If you and your wife purchase it you will be responsible for condo fees and one off lump sum payments for repairs if your in laws don't have the money. Are you comfortable with that?  If it was me I would work with the assumption that the restaurant is worth nothing ( better to be happily surprised if they find a buyer) talk to a few real estate agents to get an idea of what the house could sell for and learn the local condo market to be able to help them purchase a place. ( as above I would be wary about putting the condo in my name as then all fees would be my responsibility, if your inlaws  will share their net worth with their kids that might remove some of the concern) good luck

mozar

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Do your parents know how to find restaurant buyers and negotiate? Even if the restaurant is worth something, if they are not able to have it appraised, find buyers, negotiate, that's the same as it being worth nothing. My dad once had a dying business and someone offered him 100k for it, because he has no follow through or negotiation skills he ended it up with nothing.

jeromedawg

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My father in law has run a few other restaurants so my assumption would be that he knows how to find buyers and negotiate. *However* I also wouldn't be surprised if he doesn't know and just relied on friends or had an agent do all the legwork for him in the past. The market in his area (San Fernando Valley) isn't great and they have it listed in Korean and Chinese magazines. I have no clue how he dealt with stuff like this in the past - I just don't know if he has gotten it appraised. It's a very strange situation and I think they avoid discussing it with us. I think we may just have to expect the worst-case scenario of them walking away and perhaps liquidating whatever they can (like kitchen equipment, decorations, etc). There is an interesting aspect of all this in that they have had film/video producers use their restaurant on several occasions to film scenes from movies, tv shows and commercials. That probably happens a few times a year at most though. I don't know if that changes anything in terms of leverage but I'd guess probably not. We've asked them about keeping the business but having someone else run it but they just don't trust anyone - they're very old school and too attached. Either they run it all or they don't run it at all - there's no sense of work-life balance with them.

Cost of condos near us is pricey but in the surrounding cities it's probably more affordable. I would think for them, money-wise, it's going to be a wash with whatever they get from selling their home. I think they are saying all this, regarding putting the condo under my wife's and BIL's names, because that's ultimately going to be their inheritance to us - once they're gone we own the condo and what not. I think we would probably be OK with whatever associated fees because we would probably just rent it out if that were the case. Or we would sell it. The complicated part is the split of the inheritance between my wife and BIL.

jeromedawg

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as above I would be wary about putting the condo in my name as then all fees would be my responsibility, if your inlaws  will share their net worth with their kids that might remove some of the concern...

if not a condo, what alternative(s) would you suggest as far as their living arrangement? just to rent? or buy a smaller single-family home? low-income housing? low-income housing in my city is really tough because it is a desirable city to live in, so they try to make it difficult for more low-income families to get in... that doesn't mean they couldn't live in a neighboring city, perhaps.

Another option we may consider is for them to live in the place we're currently at (it's currently co-owned between my parents and I but we're discussing having my parents buy out my share and give me back the money I've put in towards the capital in it - this is with the assumption that we ever move out. If so, then we think my parents would be open to renting the place to my in-laws at a steep discount...probably what I've been paying back monthly towards the capital). This would all depend on A) if I get a job elsewhere and decide to relocate (which would be tough because we'd potentially be further away from her parents) or B) we buy another place (probably a single family home) nearby or in a neighboring city.
« Last Edit: August 18, 2016, 04:59:38 PM by jplee3 »

ender

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My guess is the value of a restaurant self-admitted to having been struggling for a decade which does not have much in actual capital is pretty close to zero.

Particularly if both of them work there and even moreso if they work considerably more than 40 hours a week (which in my experience is very common for restaurant owners).

kite

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Do I read that right that they have *possibly* $150,000 equity in their house + 40k in the bank?  Even if the business is worth 500 G's, they still aren't near the federal inheritance tax level, so there is no gift tax liability.  There is a look back on Medicaid eligibility.  If you've reduced your assets to qualify for benefits and then get caught up in that (by needing a Medicaid bed in a nursing home in the next couple years, for instance) it won't matter whose name is on the condo.  They'll come after assets that have changed hands.
They should get professional advice about valuing the family business, selling if possible and tax planning.  You could always buy the condo and rent it to them.  Keeping stockpiles of cash around to avoid taxes is nuts.  Fucking nuts.  Fire, flood, theft....and then the IRS if they get caught.  It's not a winning move. 

Catbert

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 They also want to downsize their home - they want to sell the current house and then let us "borrow" their money to buy a smaller condo for them to live in that would be under our names and not theirs. This way they'd qualify for Medi-Cal


Please don't participate in fraud so that your in-laws can get welfare.  While I would much prefer a single payer health care system, that's not the system we have.  Save Medi-Cal (california's version of medicaid) for those who really qualify and need it. 

tonysemail

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low-income housing? low-income housing in my city is really tough because it is a desirable city to live in, so they try to make it difficult for more low-income families to get in... that doesn't mean they couldn't live in a neighboring city, perhaps.

I would start evaluating the options and put my parents' names on the waitlist.
it may take years, so may as well get that ball rolling.

frugaldrummer

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And also, in regard to ownership of a condo -
If it's in THEIR names, and they die, and your wife inherits it - she gets what's called a stepped-up basis.  That is, if she then owns it and sells it 10 years later, she only pays capital gains on the difference between the value at the time of inheritance, and the value when she sells it.  If you buy it in your names NOW, and own it for 20 years, then sell it - you owe capital gains on ALL the appreciation from the time you bought it to the time you sell it.

And yes, there's a look-back issue with transferring assets in order to qualify for Medi-cal.  If they are in good health, it might pay to transfer it now and just realize they won't be eligible for medi-cal for several years (and even then they would have to spend down much of their savings first). 

These are complex issues and I recommend getting good financial/tax advice around these issues before making any moves.

As for the restaurant, I agree, probably not worth that much if they don't have the books to prove it is profitable enough to warrant that price, especially if the lease will not transfer.  Hiring a manager to run it for them for a good salary and just taking a small but continuing profit off the top might be better.  If it doesn't make even that much money, they probably can sell it for a small amount (for the goodwill and equipment mostly). 


Bajadoc

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The business is worth nothing. The condo is a liability. The cash, who knows. Just don't make the mistake of counting on any of it.

ooeei

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Do I read that right that they have *possibly* $150,000 equity in their house + 40k in the bank?  Even if the business is worth 500 G's, they still aren't near the federal inheritance tax level, so there is no gift tax liability.  There is a look back on Medicaid eligibility.  If you've reduced your assets to qualify for benefits and then get caught up in that (by needing a Medicaid bed in a nursing home in the next couple years, for instance) it won't matter whose name is on the condo.  They'll come after assets that have changed hands.
They should get professional advice about valuing the family business, selling if possible and tax planning.  You could always buy the condo and rent it to them.  Keeping stockpiles of cash around to avoid taxes is nuts.  Fucking nuts.  Fire, flood, theft....and then the IRS if they get caught.  It's not a winning move.

There may be state inheritance tax liability, but you're right they're way below the federal cutoff.
« Last Edit: August 19, 2016, 07:52:29 AM by ooeei »

Trinitysmom

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as above I would be wary about putting the condo in my name as then all fees would be my responsibility, if your inlaws  will share their net worth with their kids that might remove some of the concern...

if not a condo, what alternative(s) would you suggest as far as their living arrangement? just to rent? or buy a smaller single-family home? low-income housing? low-income housing in my city is really tough because it is a desirable city to live in, so they try to make it difficult for more low-income families to get in... that doesn't mean they couldn't live in a neighboring city, perhaps.

Another option we may consider is for them to live in the place we're currently at (it's currently co-owned between my parents and I but we're discussing having my parents buy out my share and give me back the money I've put in towards the capital in it - this is with the assumption that we ever move out. If so, then we think my parents would be open to renting the place to my in-laws at a steep discount...probably what I've been paying back monthly towards the capital). This would all depend on A) if I get a job elsewhere and decide to relocate (which would be tough because we'd potentially be further away from her parents) or B) we buy another place (probably a single family home) nearby or in a neighboring city.

I would look into all the option and see what will work best. I was thinking with the condo fees your inlaws are still living in the condo but you need to start paying the fees because they are out of money? Would you be able to cover their expenses plus yours? I live in Canada so I don't know the laws but as others have said get some advice to make sure whatever you end up doing is legal and won't come back to bite you later.

Axecleaver

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Need to address some of the misinformation on Medicaid. For states that accepted Medicaid expansion (CA being one), there is no longer an assets test to qualify for Medicaid, EXCEPT for long term care (nursing homes) and some other specific carve-out programs, which vary from state to state. They would likely be dual-eligible for Medicare and Medicaid in CA based on their income, regardless of how much money their house was worth or what they had in the bank.

However, CA does do estate recovery for anyone receiving benefits over 55 - so once they both die, the state may take whatever they have left in their names. Estate recovery is enforced aggressively by some states and not others - I do not know CA's stance on it.

The lookback period for assets is five years, but since there is not an assets test for the general Medicaid program, they would only perform a lookback if there was long term care involved. At that point, worst case is you would need to spend down a percentage of the dollars that were transferred before they started covered services.

As to their plan - you may want to have them meet with an estate planning attorney. They deal with this stuff every day, and could debunk some of the ideas they have about tax liability and Medicaid. Unless they're sitting on $4m+, the plan they have described for wealth transfer is supremely suboptimal for them, and for you.

jeromedawg

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Need to address some of the misinformation on Medicaid. For states that accepted Medicaid expansion (CA being one), there is no longer an assets test to qualify for Medicaid, EXCEPT for long term care (nursing homes) and some other specific carve-out programs, which vary from state to state. They would likely be dual-eligible for Medicare and Medicaid in CA based on their income, regardless of how much money their house was worth or what they had in the bank.

However, CA does do estate recovery for anyone receiving benefits over 55 - so once they both die, the state may take whatever they have left in their names. Estate recovery is enforced aggressively by some states and not others - I do not know CA's stance on it.

The lookback period for assets is five years, but since there is not an assets test for the general Medicaid program, they would only perform a lookback if there was long term care involved. At that point, worst case is you would need to spend down a percentage of the dollars that were transferred before they started covered services.

As to their plan - you may want to have them meet with an estate planning attorney. They deal with this stuff every day, and could debunk some of the ideas they have about tax liability and Medicaid. Unless they're sitting on $4m+, the plan they have described for wealth transfer is supremely suboptimal for them, and for you.

Thanks for the tips all. Besides an estate planning attorney, are there other specific resources that would be good to consult? A financial planner or advisor? A CPA? They actually consult with a CPA for a lot of their financial stuff, but I don't trust him... he just gives off a slimy weasel-like aura whenever they talk about the things he suggests. One time my wife asked him a simple question about our concerns with them gifting us money and tax implications (as we were not as educated about it) and he responded in a very frustrated tone almost like he was about to yell at us for asking. He then went on to lecture us about how they need to enjoy their lives and should spend money on whatever they want... he seems to only be encouraging their demise. Therefore, if they're going to consult with a CPA, I'd rather have them consult with one who isn't biased towards their financial demise. It just seems extremely irresponsible of him, especially considering he's a CPA.

Fuzz

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You're better off having them talk to an estate attorney. It will *feel* somewhat expensive, but will be much cheaper/less painful than their schemes.

That said, it sounds like you have zero control over your in-laws (situation normal), they are not interested in your advice, and are about to make a series of extremely dumb decisions. It happens.

Dicey

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Sorry, the search function on this forum is somewhat sucky, just as surely as my memory is, but wasn't there a thread about this before that had a lot of helpful responses? Maybe it was it someone else whose situation sounded eerily similar? Does anyone with stickier brain cells remember?

jeromedawg

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Sorry, the search function on this forum is somewhat sucky, just as surely as my memory is, but wasn't there a thread about this before that had a lot of helpful responses? Maybe it was it someone else whose situation sounded eerily similar? Does anyone with stickier brain cells remember?

I think I did post something about my in-laws before, but I think the situation was a bit different back then and there was more uncertainty around what they were wanting to do at that point in time.