My parents want to gift me their portion of our co-owned condo... bad idea?

[jeromedawg]

Basically, it's going to be an early inheritance with a contingency agreement drawn in that I would "owe" my brothers the equity of their shares at the time of my parents' death - the equity to pay out would come out of my parents' trust fund minus my portion. The current arrangement with my parents is 75%/25% tenants in common where I own the smaller percentage. So let's just say, for example, that their 75% is worth $450k. This would mean that at the time of their death, each of my brothers would receive $150k out of the trust fund and I would not receive a $150k portion because it was already factored into the equity of the condo when ownership was signed over.

This all came up because my wife and I are having our trust and will done and the tenants in common 25% ownership was raised where only my name is on the deed so I would need to add my wife's name. I initially let my dad know this is what we needed to do in order to get our will/trust done and factoring in the 25% ownership. I also if his lawyer could change the names on the title or if I should just have my lawyer do it. My dad first came back saying maybe we should buy their 75% portion out or perhaps they could carry a mortgage. I was hesitant about this and told them we'd feel more comfortable just having them buy our part ownership back. But he spoke with my mom as well as their lawyer and they determined that gifting it to us would be the "cleanest" most preferable thing for them - I think a large part of it is that they don't want to deal with generating additional income since they're retired, etc. But they said their reasoning is to help us build equity because we have none. Reading "The Millionaire Next Door" I'm feeling quite guilty of potentially receiving this huge economic outpatient care benefit.

One of my biggest concerns is the strings attached. Immediately after talking about helping us build equity (to buy a bigger place lol) my mom started talking about how she wants us to consider moving up to the Bay Area (LOL!). At that point I was like "See, this is why we are hesitant about all of this - there are obviously strings attached, despite the fact that you'd like to think there aren't" to which she immediately denied. But I just think there are going to be certain expectations they will hold us to, subconsciously or not, as well as other unforeseen expectations/strings that will have caught us off-guard. Not to mention, I think this *may* cause some amount of ill-will amongst my brothers and SILs based on the likelihood of appreciation and how they would not be benefitting from it. That said, do you guys think this is a good idea and worth taking them up on for the sake of "equity"? I mean, it *sounds* great but is it really?

On a side-note: for whatever stupid reason, I broached the idea of my current potential real estate investing ventures with my parents. I don't know why I brought it up - both my parents are ultra-conservative and would rather have me consult with their financial advisor for investing matters. My mom immediately started freaking out saying how she's concerned about how I'm talking and wants to know who I've been talking to and where all these crazy ideas came from. She kept telling me how the way I'm talking is really scary and that real estate is really risky. It was probably 10-15 minutes of back and forth bantering between a risk-averse person and risk-tolerant person, and a bit tense at times. I find it somewhat ironic though since they own a few rental properties themselves (but they are local except the one that we co-own here in SoCal). Her main concern is that I lead a stable life so I can provide for my family, put my two kids (for now) through college [hah], etc... she thinks that with real estate investing, I'm going to lose it all and go bankrupt. It was almost like listening to someone reading various snippets of zerohedge articles to me. She then told me to talk to both my brothers (I'm assuming because they too hold the same viewpoint as her and my dad). The oddest thing she said at the end was "well, if you think it's something you'll enjoy doing then I'm okay with you going into it full time. But I think it's not a good idea for you to do it on the side because you'll be sacrificing being there for your family" - I suppose I see what she means but I think it's way risker to dive into REI head-on and quit my day job versus trying to do it on the side when just starting out.

I should point out that I'm the youngest of three and my mom has, unfortunately, inherited her mother's worry-stress-freakout gene (if such a gene exists). The combination of "he's the baby syndrome" and her worry-wart mentality often leads her to get into her teacher/lecture mode. And she's the type of person who can't sleep at night because she'll run things through her head over and over, even when it doesn't directly concern her. They're visiting in a week, so fun-times ahead :P Either way, I realize I'm a grown-a man and plan on making my own decisions. Just looking for some feedback to make a wise(r) decision :)

[Another Reader]

In your shoes, I would either sell the condo and use your 25 percent to buy something else, or I would buy out your parents and get a mortgage for their share.  This entanglement is only going to lead to family problems and disharmony.  They will constantly remind you of this gift and use it to control and manipulate you.  Best to cut that off now and evenly divide the assets among the three kids when your parents pass away.

[jeromedawg]

In your shoes, I would either sell the condo and use your 25 percent to buy something else, or I would buy out your parents and get a mortgage for their share.  This entanglement is only going to lead to family problems and disharmony.  They will constantly remind you of this gift and use it to control and manipulate you.  Best to cut that off now and evenly divide the assets among the three kids when your parents pass away.

Yea... I'd lean towards either or rather than the gift... I just don't feel so comfortable taking it as an early inheritance because of all the expected/unexpected baggage. They have subsidized my current living situation already plus putting me through college and more. They've helped my brothers out in similar ways. I think they feel like it wouldn't be a bad idea to reduce their tax burden now if they can. Unless they're doing this because they actually helped one or both my brothers out in some way far greater than how they've helped me, and feel guilty like they should be giving me more. Or perhaps it's because I'm the "baby" that they feel this way too. *facepalm* - I'd like to think that's not the case either way.

[Rowellen]

In your shoes, I would either sell the condo and use your 25 percent to buy something else, or I would buy out your parents and get a mortgage for their share.  This entanglement is only going to lead to family problems and disharmony.  They will constantly remind you of this gift and use it to control and manipulate you.  Best to cut that off now and evenly divide the assets among the three kids when your parents pass away.

I agree with this.
What happens if you want to sell? Do you have to pay your brothers then? Or are you trapped there until your parents pass? What if you've made improvements? Do your brothers/parents pay a 1/4 share? I can't imagine they'd want to. But then if they don't, and the value increases, how do you work out how much is your parents original investment and how much is your improvements? What if you parents somehow lose or spend all the rest of their money and their is nothing else left to divide? Do you have to pay your brothers from your own pocket as opposed to just getting less from the estate? Seems way too messy for my liking. And although I don't know you or your brothers, money can bring out the worst in people even if you would never expect it.

[jeromedawg]

In your shoes, I would either sell the condo and use your 25 percent to buy something else, or I would buy out your parents and get a mortgage for their share.  This entanglement is only going to lead to family problems and disharmony.  They will constantly remind you of this gift and use it to control and manipulate you.  Best to cut that off now and evenly divide the assets among the three kids when your parents pass away.

I agree with this.
What happens if you want to sell? Do you have to pay your brothers then? Or are you trapped there until your parents pass? What if you've made improvements? Do your brothers/parents pay a 1/4 share? I can't imagine they'd want to. But then if they don't, and the value increases, how do you work out how much is your parents original investment and how much is your improvements? What if you parents somehow lose or spend all the rest of their money and their is nothing else left to divide? Do you have to pay your brothers from your own pocket as opposed to just getting less from the estate? Seems way too messy for my liking. And although I don't know you or your brothers, money can bring out the worst in people even if you would never expect it.

That's a good point. I think my parents are assuming we'll keep the place as 'investment' property but we may decide not to. Their main purpose for doing this, in their words to us, is so we  can "free up our equity so we can go buy a bigger house." At this point in time we have no desire or need to get a bigger place, especially with the market being in at least one of its peaks. If we buy, we are only going to buy during a downturn, and who knows when that will be.

Good point on improvements too - the assumption is that any improvement we make will be our responsibility - I think this is part of the reason why they were saying they would predetermine the non-appreciated portion that my brothers would receive once they pass. 
But if we sell while they're still alive, that would likely result in my brothers/SILs being ill-willed in the case that there was appreciation on the place and they're stuck the amount specified by my parents (this is even outside of any improvements we make). Unless my parents write a provision into the trust/will that states we must divide the proceeds based on the current appraised value at the time and for them less any improvements we made ourselves (but that goes back to your point about determining what improvements might have caused any sort of appreciation and dividing that part out accordingly). Sounds like a mess...

In the worst-case scenario where they lose/spend all their money and nothing is left, then yes, I would be expected to repay my brothers for whatever their determined portion would be at the point that my parents pass.

So there are all these what-ifs and risks with the whole thing, and my parents seem to downplay it because 1) they're doing it to help us, 2) their lawyer suggests doing it this way, and 3) all these terms are made on assumptions they have that will only have spillover effects on us and not them.
That's why I'm confused as well about how my mom tries to play it risk-averse with everything she does (and subsequently heralds warnings to others to not take chances because even the smallest of risks is too great a risk).

[Tyson]

They want to gift it to you, because that's best for them (cleanest).  And they want to use it to control some of your decisions now and in the future, also what's best for them.   Hmmm.

[Linea_Norway]

A gift in the form of an early inheritance with rules for paying back your brothers later is strange and complicating stuff. I support the suggestion above to pull yourself out of the joint venture (sell your part) and invest on your own. This way you will have no strings attached. Getting a gift from your parent though, is a nice thing. But the best way of doing that would be to let your parents give you no more than your fair share of early inheritance and reduce that from what you would get when them pass. This way you don't own anything to your brothers. Although, if your parents would decide to spend most of their money later, your early inheritance might be higher than your fair portion and you would have to pay your brothers back. The safest option would be that you and your parents would sell the house and they divide whatever they want to spend of their share among you and your brothers, so that all get an equal amount of help (minus what other brothers already have received on help earlier).

[frugaldrummer]

Has the property appreciated since you bought it? There may be significant tax consequences if they gift this to you now versus you inheriting it after their death. You should consult an accountant before doing anything.

[jeromedawg]

Has the property appreciated since you bought it? There may be significant tax consequences if they gift this to you now versus you inheriting it after their death. You should consult an accountant before doing anything.

The sucky thing is that we went in on it right before the meltdown, so we got in relatively high (around $523k). At this point it's probably worth around $550k or so. What might one of the tax consequences be in cases like this?

[frugaldrummer]

It's my understanding that if you inherit a property, the tax basis is " stepped up" to the value at the time you inherit it. If you were to turn right around and sell it, there would be no appreciation to be taxed on.

If they gift it to you now, and let's say it's worth a million when they die and you sell it then to pay off your siblings shares - you might have to pay taxes first on that $450k appreciation.

There are other complexities, definitely worth speaking with a tax accountant about all the ramifications.

[Another Reader]

How are your parents treating their interest for tax purposes?  If they bought it as an investment, there could be depreciation recapture.  By the time you pay selling costs, there is probably no capital gain.

[jeromedawg]

How are your parents treating their interest for tax purposes?  If they bought it as an investment, there could be depreciation recapture.  By the time you pay selling costs, there is probably no capital gain.

Not quite sure on what they're doing in terms of reporting - are they required to report if it's a promissory note between two private parties?

In any case, my parents thought about it more and just brought up the idea of carrying back the mortgage (under the context of their trust) so I'd basically just be making monthly payments into the trust. This seems like a less messy way to go about doing it that would help benefit us in terms of equity. As far as strings attached, I'm not as sure - it probably wouldn't be as bad but they couldn't leverage the fact that it's a "gift" in that the loan they'd be carrying back they would come up with the "fair market value" (so it wouldn't really be too different from anyone else offering seller-financing on favorable terms). At least, I don't think any of us would have the same expectations as if they straight up "gifted" us the thing as an early inheritance. Thoughts on this arrangement?