Author Topic: Am I an ungrateful (future) heir, or is this screwed up?  (Read 21813 times)

BronzeSpoon

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Am I an ungrateful (future) heir, or is this screwed up?
« on: December 01, 2013, 03:42:07 AM »
Executive summary:
When I was a kid, my parents made me a 40% partner on paper in one of their businesses, now they expect me to pay taxes out of pocket on 40% of the earnings, though I won't see a penny in return until they die. Is this reasonable? If not, what should I do about it?

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When I was a child, the top estate tax rate in the US was 50%. Imagining half of what they'd built disappear in taxes if they didn't act, my parents made me and my siblings partners in one of their businesses and, over the space of a few years, transferred ownership to us. I currently "own" 40% of that business, or about $300,000.

Unfortunately, that 40% stake means I have to pay taxes on 40% of the profit out of pocket, from my work as a consultant. My parents take 100% of the profit and view the taxes I incur as the "price" of my inheritance. So far, it's left my husband and me on the hook for about $60,000 in extra taxes over our working lives, and my parents still have long lives ahead of them.

I don't feel that the profit from the business should be mine, as I didn't do anything to earn it, but I feel the taxes are a business expense, and so should be covered by the business. I've told my parents as much, but they're adamant this is simply the way the world works. I don't want to cause a rift in the family, but I find the situation more and more unbearable as the years drag on. I just don't see what I can do about it.

Am I unreasonable? If not, any advice?

What I've tried so far:
* Getting my siblings onside. They don't care because they don't earn much and my parents cover their taxes.
* Speaking with my parents' accountant. He finds the situation unreasonable as well, and has told my parents as much.

Honest Abe

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #1 on: December 01, 2013, 03:54:40 AM »
Just to be clear, you don't actually receive any income from this business? If now, then yes it's screwed up, and what really seems to be happening is they are seeking financial assistance from you in some convoluted way. Why else would they "cover" your siblings who can't afford to pay and not cover you?

Maybe a different conversation needs to be had.... Are they/the business in trouble financially?

Snow White

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #2 on: December 01, 2013, 04:39:50 AM »
It is screwed up. I'd "disinherit" myself from any future benefits and stop paying their taxes. Especially if you are young and have time to build your own financial security.  That $60,000 you've already paid them could have grown to a significant sum of money if it had been invested for the long haul and you left it alone.

The costs attached to your future inheritance are too high, in my humble opinion.

SnackDog

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #3 on: December 01, 2013, 05:04:53 AM »
Tell them the way Your World works is that you will only pay taxes on earnings passed to you. Depending on how long this goes on it could be a huge money loser for you. The business could be gone in 20 years or liquidated to pay legal or medical bills.  Your parents world view suggests trouble ahead. Get out!

chasesfish

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #4 on: December 01, 2013, 05:12:29 AM »
I see this situation often.  I'm assuming this is an S-Corp, LLC, or Limited Partnership.  You should tell your parents you need a distribution for taxes, somewhere between 30-40%.

What type of business is it?  If this is a nice real estate partnership and your getting hard tangible assets at the end, I'd suck it up and pay the taxes.  If it's not, then you may want to consider tells them that you'll pass.

Cyrano

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #5 on: December 01, 2013, 05:55:27 AM »
You are a passive partner or S corporation shareholder in a business that makes few or no distributions. If the books are open to you, and the business is on great financial footing, this might be a good long term investment.

If the books are not open to you, you can't tell whether you're being screwed. Get access or get out.

If the taxes for this business are more than 25% of your annual savings, you have a diversification problem. If everything else seems solid, you might consider asking for a partial buyout. Unless you're excited about operating the business if and when you inherit.

If the books are open to you, determine whether liquidation of the business could distribute the earnings you have already paid taxes on. If it could, you are making a long term investment, evaluate it accordingly. If it could not, you are giving your parents an interest free loan, and they are underwater.

The sibling issue is a question of fairness. If your parents are paying taxes on the siblings share but not yours, you could ask that the different treatment be used to increase your stake relative to your siblings. But only if this is a business that you are excited about owning and operating some day.

ShortInSeattle

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #6 on: December 01, 2013, 09:44:34 AM »
To me it sounds screwed up. I'd get the advice of an attorney.

MelodysMustache

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #7 on: December 01, 2013, 10:45:34 AM »
It is screwed up.  If you own 40% and are paying 40% of the taxes then you should be getting 40% of the profits each year.  Since that is not happening you need to extract yourself from the situation.

Russ

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #8 on: December 01, 2013, 10:52:09 AM »
I'm thinking that if you aren't seeing any profits there might not actually be any, which is still not a profitable situation for you but is at least more defensible from your parents' standpoint. First step is get a look at the books for sure. It's just a bunch of speculation otherwise.

^it's probably clear to someone who actually knows about this stuff that I have no idea what I'm talking about.
« Last Edit: December 01, 2013, 10:54:47 AM by Russ »

Russ

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #9 on: December 01, 2013, 11:02:35 AM »
Also, anybody telling you
Quote
this is simply the way the world works
is just telling you the way their world works. No need for you to take part in that world if you don't want to. At the very least, I would hope that your parents support your agency to make your own decisions as an adult.

Zaga

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #10 on: December 01, 2013, 11:11:28 AM »
Wow, I'd be out of that deal so fast!  If it damages family relationships, so be it, they are taking advantage of you by forcing you to pay a portion of their taxes.  If you were actually receiving income it would be different.  Like others have said, you can save your own money and secure your own future without the dubious possibility that this business will be worth anything when they eventually pass on.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #11 on: December 01, 2013, 12:04:28 PM »
Thanks for all of your responses.

Some answers to questions/comments in the thread:

  • It's a partnership. The underlying asset is real estate.
  • I have seen the books, though it was some time ago. The business seems to be doing well according to various sources.
  • I don't receive any income from the business.
  • The taxes paid are less than 25% of my savings.
« Last Edit: December 01, 2013, 05:42:37 PM by BronzeSpoon »

Honest Abe

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #12 on: December 01, 2013, 01:16:20 PM »
To make you feel better about not going along with this:

(Amount you are paying this year) * (parents life expectancy) then compound interest at 7% for that amount of time.

My guess if the number you get will be less than 40% of the value of the business. This doesn't make sense for you.

Not to MENTION that you're paying taxes with your own after-tax income.

Boz86

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #13 on: December 01, 2013, 01:24:42 PM »
Is it a Limited Liability Partnership? http://legal-dictionary.thefreedictionary.com/Limited+Liability+Partnership

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When I was a child, the top estate tax rate in the US was 50%. Imagining half of what they'd built disappear in taxes if they didn't act, my parents made me and my siblings partners in one of their businesses and, over the space of a few years, transferred ownership to us.

They did this to manage the estate tax which will occur some time in the future, depending on the newer estate tax rules. A trust might have set this up better, but to be completely heartless about this, if you're a 40% owner you should be receiving 40% of the income, depreciation, etc.

If not -- I am not an attorney so this is not legal advice -- it seems to me that not only are they expecting you to pay taxes for income you're not receiving, you're on the hook for a host of legal disasters that could occur and leave you and your siblings liable.

In your shoes, as I understand the situation, I'd talk to an attorney.

KingCoin

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #14 on: December 01, 2013, 01:46:17 PM »
Yes, it's crazy that you're paying taxes without receiving income. It's worth asking, is this scheme even legal? Are your parents essentially robbing you of legally entitled income? You should talk to a lawyer, and if it is, you should tell your parents that you don't want to risk legal complications down the road when ownership is transferred or the properties are liquidated. If the corporation owes you tons of income, that may represent a large lien against the property and may entitle you to full ownership at the expense of your siblings. How does your parents accountant justify this arrangement? Could he be legally implicated as well? Do your parents have a lawyer that offers advice on matters related to this corporation. While you don't have to threaten anyone with legal action, asking some pointed question could turn up the heat on the various players involved, and possibly right this ship.

At the very least, if your parents are covering your siblings taxes but not yours, you should be accruing additional equity in the business to compensate. If not, you should just tell them you have other, more pressing, priorities for your money than paying these taxes. If your siblings aren't paying taxes, telling your parents to go pound salt might be awkward at first, but it's hard to imagine that something that's ultimately equitable would cause a rift in the family.

As other have wondered, is there something going on with your parents finances that they don't want to pay the taxes themselves? Are they viewing your tax payments as something of a reverse mortgage of the properties?

Daleth

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #15 on: December 01, 2013, 01:49:48 PM »
Is it a Limited Liability Partnership? http://legal-dictionary.thefreedictionary.com/Limited+Liability+Partnership

---
When I was a child, the top estate tax rate in the US was 50%. Imagining half of what they'd built disappear in taxes if they didn't act, my parents made me and my siblings partners in one of their businesses and, over the space of a few years, transferred ownership to us.

They did this to manage the estate tax which will occur some time in the future, depending on the newer estate tax rules. A trust might have set this up better, but to be completely heartless about this, if you're a 40% owner you should be receiving 40% of the income, depreciation, etc.

If not -- I am not an attorney so this is not legal advice -- it seems to me that not only are they expecting you to pay taxes for income you're not receiving, you're on the hook for a host of legal disasters that could occur and leave you and your siblings liable.

In your shoes, as I understand the situation, I'd talk to an attorney.

Yes, stat. Talk to an attorney, and bring all the info you've given us to him/her, plus the following:
- What's the corporate structure? S-corp, LLC, what?
- Are you named on the company's insurance policies? (You should be--adding you should cost them little or nothing--and you need it in case you're exposed to any liabilities through this company).
- Do you get a K-1 or other appropriate tax form (whichever form goes with this type of corporate structure) each year?
- Do your parents get any cash out of the business each year (do they pay themselves salaries or a share of the profits), or is everything plowed back in to the business?

Letj

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #16 on: December 01, 2013, 02:26:17 PM »
Thanks for all of your responses.

Some answers to questions/comments in the thread:

  • It's a partnership. The underlying asset is real estate.
  • I have seen the books. The business seems to be doing well.
  • I don't receive any income from the business.
  • The taxes paid are less than 25% of my savings.

I have a real estate business too.  What is happening to the profits in the business? Are you sure your parents are taking it?  Is it being reinvested?  If so, is the real estate stable and/or appreciating?  If the profits are not being reinvested, is it being held in a business account?  If your parents are reinvesting all the profits on behalf of the business or adding to acquisitions, that could explain their position.  However, I thought you mentioned that they are keeping all the profits.   I see several people are giving you advice to get out but I don't think anyone should without additional facts.  As someone who has done this for a long time, I would like to say that it depends.  It depends on answers to the questions I posed and other factors.  Let's assume that when your parents acquired the real estate it was worth $100K but now it's worth $2MM, then their position becomes more reasonable, after all they have to prepare for their retirement and why should they distribute the profits to children who would one day inherit such a stepped up asset?.  They may also be considering passing on complete control to you and your siblings long before they die. I think you need to communicate with them to understand their motives. I don't see them managing this much after retirement.  If the property has appreciated substantially, I think you'll be in a good position even if you pay the taxes.  Barring any unforeseen circumstances such as a precipitous market drop which would wipe out all appreciation (highly unlikely and if that happens then we the entire world is in trouble), this can be a nice retirement and possibly lead to an early retirement for you.

Zaga

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #17 on: December 01, 2013, 02:39:23 PM »
That sounds even worse than I thought.  It sounds like you are in business together with your parents and siblings, which means that legally 40% of the profits after expenses should be yours.  Now, there are ways of adjusting that percentage, such as paying your parents a wage as "managers", which is totally okay as long as the pay they receive is reasonable for the services rendered.

Now, what you said in the first post is that they "take all of the profits".  Some of this could be structured to be management income for them (but it doesn't sound like that's what they are doing), but 40% of the rest should be yours.  Since they are taking it, you are in essence *giving* them your portion of the profits each year.  Holy cow is this a bad idea!  Do you know anything about Gift Tax?  Anything over $14,000 a year given from one person to another person per calendar year (2013 number, will adjust for inflation) is subject to gift tax, which is I think 55%.

You need accounting and legal advice, stat!  This could cost you a boatload, even above the taxes you are paying that you shouldn't.

I restate what I said before, this is a bad deal, you are most likely better off to remove yourself from the situation.

Letj

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #18 on: December 01, 2013, 02:56:09 PM »
That sounds even worse than I thought.  It sounds like you are in business together with your parents and siblings, which means that legally 40% of the profits after expenses should be yours.  Now, there are ways of adjusting that percentage, such as paying your parents a wage as "managers", which is totally okay as long as the pay they receive is reasonable for the services rendered.

Now, what you said in the first post is that they "take all of the profits".  Some of this could be structured to be management income for them (but it doesn't sound like that's what they are doing), but 40% of the rest should be yours.  Since they are taking it, you are in essence *giving* them your portion of the profits each year.  Holy cow is this a bad idea!  Do you know anything about Gift Tax?  Anything over $14,000 a year given from one person to another person per calendar year (2013 number, will adjust for inflation) is subject to gift tax, which is I think 55%.

You need accounting and legal advice, stat!  This could cost you a boatload, even above the taxes you are paying that you shouldn't.

I restate what I said before, this is a bad deal, you are most likely better off to remove yourself from the situation.

Not necessarily.  Depending on whether or not the parents take a salary or management fee, there may or may not be a profit.  In fact, they may be taking a small salary for some reason.  I can tell you that my husband does most of the maintenance on my property but I do not pay him a salary so we report greater profits than if he were paid a salary. If he were paid a salary, we would have to pay self-employment tax.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #19 on: December 01, 2013, 04:06:55 PM »
Quote
Now, what you said in the first post is that they "take all of the profits".  Some of this could be structured to be management income for them (but it doesn't sound like that's what they are doing), but 40% of the rest should be yours.  Since they are taking it, you are in essence *giving* them your portion of the profits each year.  Holy cow is this a bad idea!

I was trying to keep my initial post as short as possible, but you're right that some details are missing.

The partnership pays no salaries. It generates rental income. My parents scoop this up, all of it, and after they're done paying their taxes and the expenses on the partnership's assets, they use the money for their own living expenses, or to prop up some of their other businesses. I don't have a stake in those other businesses. I might inherit them in 30 years, but it's also possible that the businesses may no longer exist, or my parents might decide that I don't need the money (or that I'm ungrateful!) and pass them along to someone else.

Quote
Do you know anything about Gift Tax?  Anything over $14,000 a year given from one person to another person per calendar year (2013 number, will adjust for inflation) is subject to gift tax, which is I think 55%.

Yep, I know about the gift tax, but I don't think they pay it on the "transfer" of cash from me to them. I'm not sure how they do it exactly.

What's brought this to a head is that my parents are currently looking to buy a house for my ne'er-do-well brother, who will "pay them rent", though he's currently unemployed and already spending his inheritance. My parents want the partnership to buy the house.

« Last Edit: December 01, 2013, 09:23:53 PM by BronzeSpoon »

MrsPete

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #20 on: December 01, 2013, 04:45:58 PM »
Without having read the whole thread -- I really do have to go clean the kitchen, and I'm procrastinating -- I say maybe.  I paid taxes for years on an asset that belonged to an elderly relative.  It was a financial difficulty for her, and I didn't want to see the asset sold.  Yes, she could've really screwed me over, but I trusted that she wouldn't.  She didn't, and now it is mine.  It was a worthwhile investment. 


Zaga

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #21 on: December 01, 2013, 04:49:22 PM »

Quote
My parents want the partnership to buy the house.
Even more reason for you to bow out, you'll be in effect giving money to your brother to have a house.

I have a brother that is trouble, so I know how tough it can be to not help out.  I do help on little things, especially making sure the kids are clothed and have good car seats, but this just...yikes!

Fuzz

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #22 on: December 01, 2013, 05:03:26 PM »
As I understand it, what your parents are doing is crazy. And based on the fact that they are operating their business in a crazy way, I would expect them to react in a crazy way to your concerns. Good luck, but I wouldn't expect a rationale response when you point out that your parents are effectively taking your money by insisting you pay taxes on profits you do not receive and for which you are entitled.

One thought: it makes a difference if the accountant is the partnership's accountant or your parents' accountant. Assuming he is the partnership's accountant, then he owes the partnership a fiduciary duty, and not you or your parents. As a minority shareholder of the partnership (although it sounds like your 40% may be the largest share--or perhaps co-equal with your brother's), that accountant should be forthcoming with you.

It would depend on the operating agreement (which you should get immediately, I would assume the accountant would have a copy and would be required to make it available to you), but it seems that your parents are wasting corporate assets (buying a rental for your deadbeat brother), and breaching their duty to you as the minority shareholder (paying themselves profits but not you).

You would likely have legal remedies in this situation. However, to preserve the family you may not want to exercise them. I would consult a lawyer stat. You probably want to get out of this business, if for no other reason than you're a partner with people who are acting crazy by "real world" standards.

Also, some kinds of sham transactions to avoid tax consequences can expose you to liability. Talk to a lawyer. Get all the docs you can ready. Most lawyers will do a free consult.

 Good luck.

Also a disclaimer: please don't rely on "legal advice" from the internet forums like this one--do your own work, hire your own attorney. :)


BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #23 on: December 01, 2013, 05:36:18 PM »
Thanks for all of your responses.

Some answers to questions/comments in the thread:

  • It's a partnership. The underlying asset is real estate.
  • I have seen the books. The business seems to be doing well.
  • I don't receive any income from the business.
  • The taxes paid are less than 25% of my savings.

I have a real estate business too.  What is happening to the profits in the business? Are you sure your parents are taking it?  Is it being reinvested?  If so, is the real estate stable and/or appreciating?  If the profits are not being reinvested, is it being held in a business account? 

The underlying assets appear stable. They did put in a lot of work initially to restore them. They're beautiful, actually. I'm really proud of what they did.

The money is being used for whatever they need at the time. Sometimes it's reinvested in other businesses. (I don't have any stake in those businesses. I may inherit part of them. I may not. There are several others in line, who would need it more.) Sometimes, it's used for their own living expenses. There's apparently very little cash held in a business account. I apologize for not being able to answer your questions with ballpark numbers, but my only reliable source of information is my parents' accountant, and when I talk to him, he tells my parents, which makes the relationship tense.

What pushed me to write this post is that they're currently on an urgent search for a house to buy for a chronically unemployed, lazy sibling, who will "rent" from them. They intend to use the partnership to buy the house. If my balance sheet weren't linked to theirs, I wouldn't have a problem with it. They earned the money; if they want to house my deadbeat brother, that's their business. But given that the partnership affects me directly, I feel I have some say in the matter, and this project seems like a loser.

I don't want a cut of the profits. I just want to come out whole at the end of the day.

Quote
They may also be considering passing on complete control to you and your siblings long before they die. I think you need to communicate with them to understand their motives.

They say they'll never retire. I believe them. It's in their blood.

Quote
Barring any unforeseen circumstances such as a precipitous market drop which would wipe out all appreciation (highly unlikely and if that happens then we the entire world is in trouble), this can be a nice retirement and possibly lead to an early retirement for you.

My husband and I are hoping to extreme-early retire next year (on assets we built ourselves, I should add, given the context of this discussion), but extra income on paper makes this more difficult.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #24 on: December 01, 2013, 05:39:51 PM »
Also a disclaimer: please don't rely on "legal advice" from the internet forums like this one--do your own work, hire your own attorney. :)

Ha, ha. Don't worry. I just wanted to get some other opinions on the situation. Thanks for looking out for me, though. ;)

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #25 on: December 01, 2013, 05:49:25 PM »
Yes, stat. Talk to an attorney, and bring all the info you've given us to him/her, plus the following:
- What's the corporate structure? S-corp, LLC, what?
- Are you named on the company's insurance policies? (You should be--adding you should cost them little or nothing--and you need it in case you're exposed to any liabilities through this company).
- Do you get a K-1 or other appropriate tax form (whichever form goes with this type of corporate structure) each year?
- Do your parents get any cash out of the business each year (do they pay themselves salaries or a share of the profits), or is everything plowed back in to the business?

Those are all good questions and I should know the answer to them. Unfortunately, I don't have any answers aside from what's already in the thread. I need to get busy finding out.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #26 on: December 01, 2013, 05:54:56 PM »
Also, some kinds of sham transactions to avoid tax consequences can expose you to liability.

I don't think they'd do anything illegal. They don't strike me as the type. They've worked long and hard to get where they are; they wouldn't jeopardize everything to avoid a few $1000 in taxes.

stpetesean

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #27 on: December 01, 2013, 06:38:29 PM »
This is absolutely insane.

You should be getting your portion of profits, otherwise tell them to buy your share back for at least the amount you've paid out in taxes.

Russ

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #28 on: December 01, 2013, 06:46:39 PM »
I don't think they'd do anything illegal.

Maybe not on purpose...

chasesfish

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #29 on: December 01, 2013, 07:17:55 PM »
I'm going to cut through it all...

You're a 40% owner and that comes with financial responsibility,  it should also come with full access to information and some decision making ability.

I think it's pretty clear, you're fine paying the taxes if you have access to the books and some decision making.  Using a entity you own 40% of to support your brother isn't cool and you have every right to relinquish your shares (and your parents will flip when you tell them because I'm sure it messes with their plans/control)

AlanStache

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #30 on: December 01, 2013, 07:33:26 PM »
I dont think it has been mentioned but do you intend to retire in the same area the property is?  Perhaps, after talking to a lawyer..., you could live in one of the properties at reduced 'rent' in exchange for having payed the taxes and/or continuing to pay them.   

I agree, it does not sound like you are dealing with fully rational people and maybe an unconventional or innovative solution will be needed. 

Do your parents need the financial help that they are taking out of the company?  I dont get the impression they have trouble buying food and paying the power bill.  Legally I am not sure that matters but could they be taking that money from the company to save face from asking you?

Could you buy out the company and hire your folks to run it, doing it all above board?  Give your brother a house for his shares then run it properly while retired.

The story does not make you seem at all ungrateful or entitled, if you had had to pay the taxes (uncompensated) once or twice after extraordinary circumstances I would say suck it up-look long term-help the family but not with this situation where this has been and will continue to be normal for you to pay out of pocket.

Just thinking out loud here.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #31 on: December 01, 2013, 09:04:13 PM »
I dont think it has been mentioned but do you intend to retire in the same area the property is?

It's a possibility. It's a cheap, livable city, and despite everything, we'd like to retire close to family.

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Do your parents need the financial help that they are taking out of the company?  I dont get the impression they have trouble buying food and paying the power bill.  Legally I am not sure that matters but could they be taking that money from the company to save face from asking you?

They do partly rely on the money for living expenses, but it's not to save face. They built up that assets underlying the partnership themselves, so they rightly feel entitled to the cash it generates. My only problem is that it's generating paper income for me, but no distributions to cover the tax hit.

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Could you buy out the company and hire your folks to run it, doing it all above board?  Give your brother a house for his shares then run it properly while retired.

That's an interesting possibility that I hadn't considered. It's something to think about. Thanks.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #32 on: December 01, 2013, 09:12:11 PM »
you have every right to relinquish your shares (and your parents will flip when you tell them because I'm sure it messes with their plans/control)

This is what I've started calling "the nuclear option" with my husband. Things would have to get pretty bad for us to take that route, though. I'm sure it'd be years before they spoke to me again.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #33 on: December 01, 2013, 09:17:58 PM »
Without having read the whole thread -- I really do have to go clean the kitchen, and I'm procrastinating -- I say maybe.  I paid taxes for years on an asset that belonged to an elderly relative.  It was a financial difficulty for her, and I didn't want to see the asset sold.  Yes, she could've really screwed me over, but I trusted that she wouldn't.  She didn't, and now it is mine.  It was a worthwhile investment.

Thanks for that reminder. At the end of the day, I own a substantial asset that I didn't do anything to earn aside from paying the taxes on it for a few decades. In my case, I'm legally one of the owners of the property, so it sounds like I have a lot more assurances about coming out ahead one day than you did. I'm glad everything worked out for you.

BronzeSpoon

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #34 on: December 01, 2013, 09:26:44 PM »

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My parents want the partnership to buy the house.
Even more reason for you to bow out, you'll be in effect giving money to your brother to have a house.

I have a brother that is trouble, so I know how tough it can be to not help out.  I do help on little things, especially making sure the kids are clothed and have good car seats, but this just...yikes!

I know what you mean. At least my brother doesn't have kids.

Zamboni

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #35 on: December 01, 2013, 09:29:59 PM »
OY!  Money mixed with family.  Lots of good varied viewpoints here.  I have nothing to add except for my sympathy. 

ch12

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #36 on: December 01, 2013, 09:38:10 PM »
  • Get an attorney stat.
  • Hire an accountant to audit the books of the LLC.

These shenanigans are exactly the kind of thing that goes on in my own family and people just don't do the prudent thing and dig into the books (and operating agreement). If you have a 40% share, then you are entitled to 40% of the profits, especially if your parents require you to pay 40% of the taxes.

If my sister was a ne'er-do-well and my parents wanted to buy her a house with my money, I would be raising hell with a lawyer and accountant on my side and not just asking Internet Mustachians for advice. We agreed a long time ago that if one of us was a huge financial burden on the other, it would be legitimate to cut off support and/or contact. This was due to seeing what went on in our family.

happy

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #37 on: December 02, 2013, 02:29:47 AM »
No new thoughts, just adding my voice to the general view that this situation sounds quite "unusual". And +1 to getting legal and accounting advice.

The fact that you say relinquishing your share will unloose "nuclear war",  again confirms that they are, at the  very least, putting some unusual expectations and controls on you. Alarm bells going off.

Personally I think I would be trying to get out, preferably without upsetting them if this is possible. I would be getting out because I am quite capable of making my own FI and not being beholden to an inheritance that may or may not eventuate. And due to the illogical way things are proceeding I hazard there will be more grief entangled than disentangled.

But as others have said I am just some random on the internet... you know what is best for your situation - make sure you get the best expert advice before making any decisions.

PS would love to hear about what you decide /any update




willn

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #38 on: December 02, 2013, 08:36:41 AM »
I'll just answer the question in the subject:  Yes, this is screwed up. As in, majorly screwed up.  They took an amateurish approach to minimize estate taxes and in the process thought it was ok to violate so many boundaries that they probably have put their estate at risk anyway through the amount of bad feelings, and poor succession planning with your siblings.

Not a tax expert but I'll point out that if this is an LLC or S chapter corp, the tax liability is passed through to the owners personal tax return.  Tax liability therefore is only on those who get a share of the net income. (Or salary from the business).  Do you have an partnership agreement? If not, the default partnership agreement for your state will apply.

Legal and accounting advice is a must. That's the easy part. The hard part is going to be facing them down when you do the right thing, and withstanding the emotional blackmail it sounds like they are ready to use on you.   So, I'll suggest a good therapist too.

Good luck and let us know what happens.

okiedoke

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #39 on: December 02, 2013, 10:04:07 AM »
This is messed up and you're likely getting screwed.  You need the counsel of a good lawyer (who is familiar with buisness agreements and corporate stuff) soon.  Maybe a CPA too, to audit the books. 

1.  A typical arrangement in pass-through tax entities (LLCs, LLPs, S-Corps) is a clause in a shareholder/operating agreement that mandates that a percentage of profits equal to the underlying tax burdens of the owners generated by the entity be distributed each year (often, the tax burdens of the largest shareholder, or the shareholder with the largest total income, who would typically be taxed at the highest rate).   This is essential to protect owners like yourself who generate "phantom" or "paper" K-1 income that generates a tax bill.   You need this. 

2.  Moreover, partnership and other pass through entities generally require pro-rata distribution of profits.  Sure, there can be management fees / salaries paid to owners who are also actively operating the business, but (a) these need to be equivalent to what a non-owner employee would be paid, and (b) approved by the owners/directors, per the shareholder agreement (which hopefully exists!).  Then, whatever is considered partnership/LLC "profits" at the end of the year needs to be either distributed pro rata or retained in the owners' captial accounts.

3.  You have a right, as an owner, to review the books and records of the company.

4.  A good lawyer will give you the advice discretely, and set out a plan for you to broach all of these topics in a non-confrontational manner.  This does not have to be contentious, although it may well become that way.  Look for an attorney with whom you have a good rapport, who is sensible and not spoiling for a fight.  It may ultimately come to a dispute, but you need to have a plan in place that will explore all alternatives before that happens.

Disclaimer:  I'm not your lawyer or your CPA (I don't even know you), but this is common, standard advice.  Retain someone soon. 

 
« Last Edit: December 02, 2013, 10:06:25 AM by okiedoke »

frugaldrummer

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #40 on: December 02, 2013, 10:22:58 AM »
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You should be getting your portion of profits, otherwise tell them to buy your share back for at least the amount you've paid out in taxes.

I like the idea of them buying you out for the amount you have paid in taxes. It might cause some dust-up in the beginning, but in the long run, I think your relationships will be healthier without these entanglements.

The way things are now, you feel ripped off because they are taking money from you but giving to your siblings.  They are entitled to do as they see fit with their money, but it's not appropriate to expect you to pay for your siblings.

It doesn't sound like your parents would really be in dire straights if you declined to pay the taxes.  And it sounds like this is not really that marvelous an investment for you; the money you have paid in taxes, if invested in your own rental properties, would probably be returning you as much or more than you will inherit from them at some unspecified future point.

I agree with everyone else on getting your own legal and tax opinions; perhaps you will find a legal "reason" why you must back out of the company, which could help everybody save face.

CheckEngineLight

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #41 on: December 02, 2013, 10:31:02 AM »
I am a CPA and while my specialty isn't small business/enterprise type work I've seen similar situations to this in family owned/operated businesses a few times.  I haven't read all replies and this may have been mentioned already, but your parents are simply using you to financially subsidize their lives/other business ventures through your cash injection via tax payment.  I'd love it if someone else paid my income taxes as well, my income would go up by 30%+

Yes there are inherent issues in the way business is conducted now (surprised a tax audit hasnít exposed that).  Again without knowing the arrangement and your relationship with your parents it's tough to say what you should/shouldn't be doing as this is more of a family dilemma than a business one. 

CheckEngineLight

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #42 on: December 02, 2013, 10:36:25 AM »
Forgot to add, it's common to assign shares/pay dividend income to family members for income splitting purposes, but I've never seen one where the main stakeholders (your parents) are leaving you on the hook for taxes for something that you have zero involvement in, hence why I am thinking they are using you as a subsidy more than anything, which would lead me to also believe the business is not cash flow positive/leveraged/not enough working capital/could be a number of things.

Daleth

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #43 on: December 02, 2013, 11:10:25 AM »
Also, some kinds of sham transactions to avoid tax consequences can expose you to liability.

I don't think they'd do anything illegal. They don't strike me as the type. They've worked long and hard to get where they are; they wouldn't jeopardize everything to avoid a few $1000 in taxes.

I'm not sure what they're already doing is legal. The entire point of a partnership is that all partners share in the expenses AND the profits. That show it works--whether it's a multi-member LLC (which can be taxed like a partnership) or just a partnership. Same goes if it's an S corp; I highly doubt that it's proper to make disbursements of S-corp funds to some shareholders but not others, assuming everyone has the same class of shares. I mean, think about it:

If they make $100k in profit each year, and on paper $40k of that is yours so you get charged taxes on it, but in fact the entire $100k goes to them, guess who's NOT telling the IRS the truth about how high their income is? Yup: your parents! Think that's legal? I'd be surprised.

If they want to handle the money differently, they should probably be paying themselves salaries that eat up most or all of the profits--if they did that, it wouldn't change THEIR cash flow or their TRUE, LEGAL tax liability one iota but it would relieve YOU of any tax burden since there would be no profits to owe taxes on. That's the legal, fair and square way to do what they're doing.... probably...I keep saying probably because I don't know what state they and their business entity are in or what type of entity it is.

You really need to talk to a lawyer, preferably one in the state where the business entity is, and one who is familiar with both corporate and tax law (corporate is shorthand for business entities of whatever type).

KingCoin

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #44 on: December 02, 2013, 11:15:14 AM »
I am thinking they are using you as a subsidy more than anything, which would lead me to also believe the business is not cash flow positive/leveraged/not enough working capital/could be a number of things.

It's a total head scratcher as to how they justify this to themselves. Last I checked, most people don't buy their inheritance via installment plan. If you're going to pay for something, it might as well be assets you own outright and control, not assets that you may or may not receive at some indeterminate point in the future.

It's a shame you didn't take a stand from the get-go. No one likes to get off the gravy train once they're on it. However, given that this isn't something you signed up for, I can't imagine that opting out would create a huge rift (maybe one awkward Christmas); that is, if you're parents truly don't have liquidity problems. I guess you're in a better position to judge.

Given that the original purpose of this scheme has been obviated by change in tax law, is there any chance that everyone sells ownership back to your parents for $1? This would be the simplest and most equitable solution, though there would still be the outstanding matter of your paid-in taxes.

Maybe a hostile takeover? I bet your brother would be amenable to a $100k bid for 11% of the business :)

MichaelR

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #45 on: December 02, 2013, 11:33:09 AM »
Mixing family/friends and business is always fraught. The reason is that that there are different norms of behavior in financial relationships and social relationships. When social norms of behavior are used to leverage financial advantage we feel very uncomfortable and rightly so. Moreover creating financial relationships where there was a social one can undermine the goodwill and even destroy the social relationship. Its very hard to get that back.

A lot of the replies in this thread are from the perspective of the financial relationship. I wonder if you need to decide what is more important - your relationship with your parents or the potential financial advantage. It is clear the current situation is putting your relationship with them under strain. Perhaps a calm, heart to heart discussion with them is in order. You could point out the angst you are feeling and suggest that you move out of the business in order to maintain your family relationships. You may have to be gently persistent about this over a period of time.

AlanStache

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #46 on: December 02, 2013, 11:35:32 AM »
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Maybe a hostile takeover? I bet your brother would be amenable to a $100k bid for 11% of the business :)

Yes.  I think many here are to willing to suggest walking away from probably several hundred thousand dollars.  To bad family politics might make this a non-starter.  And having your folks work for you might also not be so great.

gooki

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #47 on: December 02, 2013, 12:45:40 PM »
As above, have you considered buying your siblings shares so you can get majority ownership ASAP?

Alternatively, have you considered selling your 40% stake to an external property investor?

Psychstache

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #48 on: December 02, 2013, 01:00:14 PM »
I wonder if you need to decide what is more important - your relationship with your parents or the potential financial advantage.

You also have to factor in the impact that this is having on HER family aka her husband and future children. If you are a little angsty about your parents using your success to help themselves and now your chronically-needing-rescue brother, I imagine your husband is less than thrilled with the arrangement.

When parents pass away and kids grow up and leave the nest, the spouse is the one you are left with. Make sure to support that relationship as well.

KingCoin

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Re: Am I an ungrateful (future) heir, or is this screwed up?
« Reply #49 on: December 02, 2013, 01:24:51 PM »
As above, have you considered buying your siblings shares so you can get majority ownership ASAP?

Alternatively, have you considered selling your 40% stake to an external property investor?

My hostile takeover suggestion was largely tongue-in-cheek, but it does highlight the absurdity of the situation. Heck, if you really wanted to play hardball you could have your attorney demand 15 years of back income x 40%.

My biggest worry is that as the years roll by, this corporation starts getting raided like a piggy bank; properties are mortgaged or sold, necessary renovations aren't done, questionable accounting and business decisions are made. It's possible that by the time you inherit it, it's negative cash-flow and much more of a liability than an asset. Purchasing a house for your brother is a warning sign, not to mention that as the corporation's assets become more entangled with your family's, exiting in an orderly way becomes more complicated. That's why I think you need to either exit your ownership position (and hope your parents treat you equitably when they pass) or partake equally in the benefits. Right now, you're getting the worst of both worlds and there's a substantial risk that things get worse, more complicated, and less cordial later.
« Last Edit: December 02, 2013, 02:12:43 PM by KingCoin »