To trust or not to trust?

[The Walk of the Penguin Mich]

We met with our accountant to find out what the tax implications will be for us on my dad’s house (still on the market, some nibbles, maybe a bite).

As none of us have lived in the house, we are all getting hit by capital gains on it to various extent except SM as she lives there.  However, the accountant asked me a question and I was curious as to how others would respond.  He asked me if we would be willing to quit claim the house back to her and she gift us our portion after it sells.  That implies that we would have to trust her implicitly.  My response was nope.

Is there anyone you would trust enough to do this? 

ETA:  My siblings agreed with me.

[chiver78]

I'm with you and your siblings. but could you draft up a legally binding agreement for exactly this, to CYA? I'm not sure if you tear it up once everything is settled, if it still is in effect.

[vonna]

I would, but am probably in the minority.  I wouldn't want my dad's wife to have to move if he dies first. She has been a great partner to him, he literally almost died of a broken heart after my mom died, so I am grateful for the joy she has brought into his life.

[Lizard Queen]

No, with her story, I would not trust her. There might be a few people I'd trust for that, but not many.

[justme]

I'd trust my parents, but ya know they trusted me to lend me $30k while I waited on a cash out refi to close out. I'd probably trust my brother though that could change.

Plus she can only gift you so much without hitting the gift tax reporting laws. She doesn't have enough money to ever actually worry about that, but I'd worry that would complicate if I didn't trust the person completely.

[The Walk of the Penguin Mich]

Aug 1, 2021 17:05:50 GMT -5 vonna said:

I would, but am probably in the minority.  I wouldn't want my dad's wife to have to move if he dies first. She has been a great partner to him, he literally almost died of a broken heart after my mom died, so I am grateful for the joy she has brought into his life.

My SM moving is ALL HER CHOICE, she does not have to move.  There has been absolutely no pressure on her to move, and in fact we have tried to get her to remain here for her sake (including paying the taxes, so she is living free other than utilities).  She is due 1/4 of the proceeds of the house, which was fully paid off 15 years before my mom died.

 

[NomoreDramaQ1015]

With what you've shared here hell no.

[susana1954]

Aug 1, 2021 17:00:34 GMT -5 The Walk of the Penguin Mich said:

We met with our accountant to find out what the tax implications will be for us on my dad’s house (still on the market, some nibbles, maybe a bite).

As none of us have lived in the house, we are all getting hit by capital gains on it to various extent except SM as she lives there.  However, the accountant asked me a question and I was curious as to how others would respond.  He asked me if we would be willing to quit claim the house back to her and she gift us our portion after it sells.  That implies that we would have to trust her implicitly.  My response was nope.

Is there anyone you would trust enough to do this? 

ETA:  My siblings agreed with me.

I'm confused.  I thought heirs got a stepped-up basis after a parent dies.  When did your father die?  Did the value increase that much since his death?  What are you talking about divided by four?

To answer your specific question, I would not do that.  Part of it is trust.  Part of it, though, is the look-back period if she ends up on Medicaid for LTC.  Who knows what will happen in the next five years?

[TheOtherMe]

I agree with you because of what you have said about how she spends money.  

[The Walk of the Penguin Mich]

Aug 1, 2021 19:22:08 GMT -5 susana1954 said:

Aug 1, 2021 17:00:34 GMT -5 The Walk of the Penguin Mich said:

We met with our accountant to find out what the tax implications will be for us on my dad’s house (still on the market, some nibbles, maybe a bite).

As none of us have lived in the house, we are all getting hit by capital gains on it to various extent except SM as she lives there.  However, the accountant asked me a question and I was curious as to how others would respond.  He asked me if we would be willing to quit claim the house back to her and she gift us our portion after it sells.  That implies that we would have to trust her implicitly.  My response was nope.

Is there anyone you would trust enough to do this? 

ETA:  My siblings agreed with me.

I'm confused.  I thought heirs got a stepped-up basis after a parent dies.  When did your father die?  Did the value increase that much since his death?  What are you talking about divided by four?

To answer your specific question, I would not do that.  Part of it is trust.  Part of it, though, is the look-back period if she ends up on Medicaid for LTC.  Who knows what will happen in the next five years?

There is a question as to when the stepped up basis is, is it when my mom died?  My dad deeding it to us?  When my dad died?  The IRS is clear as mud about this.  Our accountant has successfully argued the lower end of the range.  Depending on when it is, it can be as little as 15% of 10k or as much as $40k.

Good point about her LTC and look back period.  I had not considered that.  However, the point is moot as regardless of the stepped up basis as none of us are willing to take the risk considering her lack of money management.  

[Artemis Windsong]

That would be a no go deal no matter who was involved. If you have the income to pay the taxes then pay them.

[Mardi Gras Audrey]

I would definitely not, even if I could trust the person. This seems to border on the line of tax evasion and would not be something I would want to be involved in. If you ended up in court over this, you definitely could have some issues with “clean hands”. I would just do it the way it originally was planned, even if that meant paying capital gains.easier to sleep at night and don’t have to be involved in any drama

[tallguy]

Aug 1, 2021 19:38:54 GMT -5 The Walk of the Penguin Mich said:

Aug 1, 2021 19:22:08 GMT -5 susana1954 said:

I'm confused.  I thought heirs got a stepped-up basis after a parent dies.  When did your father die?  Did the value increase that much since his death?  What are you talking about divided by four?

To answer your specific question, I would not do that.  Part of it is trust.  Part of it, though, is the look-back period if she ends up on Medicaid for LTC.  Who knows what will happen in the next five years?

There is a question as to when the stepped up basis is, is it when my mom died?  My dad deeding it to us?  When my dad died?  The IRS is clear as mud about this.  Our accountant has successfully argued the lower end of the range.  Depending on when it is, it can be as little as 15% of 10k or as much as $40k.

Good point about her LTC and look back period.  I had not considered that.  However, the point is moot as regardless of the stepped up basis as none of us are willing to take the risk considering her lack of money management.  

I don't know the backstory here, but I am assuming your parents owned the house together and were not in a community property state.  My guess would then be that your father received a stepped-up basis on your mother's half of the property when she died.  The next part is unclear.  Did your father gift the house to you all before he died, as your post seems to imply?  In that case (and in my understanding), you all would inherit his basis in the property.  If he did not technically own the property at the time of his death there would be no further step-up in basis at that time.  I'm not an expert on tax law but this would be my understanding.

[The Walk of the Penguin Mich]

Aug 2, 2021 0:29:30 GMT -5 tallguy said:

Aug 1, 2021 19:38:54 GMT -5 The Walk of the Penguin Mich said:

There is a question as to when the stepped up basis is, is it when my mom died?  My dad deeding it to us?  When my dad died?  The IRS is clear as mud about this.  Our accountant has successfully argued the lower end of the range.  Depending on when it is, it can be as little as 15% of 10k or as much as $40k.

Good point about her LTC and look back period.  I had not considered that.  However, the point is moot as regardless of the stepped up basis as none of us are willing to take the risk considering her lack of money management.  

I don't know the backstory here, but I am assuming your parents owned the house together and were not in a community property state.  My guess would then be that your father received a stepped-up basis on your mother's half of the property when she died.  The next part is unclear.  Did your father gift the house to you all before he died, as your post seems to imply?  In that case (and in my understanding), you all would inherit his basis in the property.  If he did not technically own the property at the time of his death there would be no further step-up in basis at that time.  I'm not an expert on tax law but this would be my understanding.

Not a community property state.  He gifted us the house about 5 years before he died.  He technically still owned the house as he was still on the deed too.  

Like I said, it is convoluted enough that the tax accountant we consulted said he was comfortable enough to defend a stepped up basis of his death to the IRS. 

[tallguy]

Okay, my guess is then that your SM is receiving a stepped-up basis on your father's remaining interest in the house, assuming she is inheriting that.  The partial interests held by the rest of you would be unchanged by his death.  If you were to do as the accountant suggests and gift your shares back to the SM, would it not be at your existing basis?  She would not be inheriting the whole house, so stepped-up basis should not apply to your portions.  Is the idea that she could then use the $250,000 exclusion to avoid capital gains on the entire sale and then gift you all back the relevant proceeds and escape tax yourselves, because that is the only reason I can see for that suggestion.  I'm not sure that would work, depending on whether she was also on the deed for the last five years.  Doesn't the exclusion require that the seller have owned and occupied the home for at least two of the last five years to qualify for the exclusion?  She may have occupied it as her primary residence, but unless she was also on the deed I don't think she would meet the ownership test, so could not get the exclusion.  Are there other relevant details I am missing that would impact the answer? 

ETA:  Technically, I guess it could be a benefit if she were subject to a lower capital gains tax than the rest of you due to lower income.  There would be no exclusion from capital gains but still a much lower rate paid on them.  Either way, I think I would agree with keeping it clean and avoiding even the appearance of tax evasion.  Not worth the risk.  

[The Walk of the Penguin Mich]

Aug 2, 2021 2:14:20 GMT -5 tallguy said:

Okay, my guess is then that your SM is receiving a stepped-up basis on your father's remaining interest in the house, assuming she is inheriting that.  The partial interests held by the rest of you would be unchanged by his death.  If you were to do as the accountant suggests and gift your shares back to the SM, would it not be at your existing basis?  She would not be inheriting the whole house, so stepped-up basis should not apply to your portions.  Is the idea that she could then use the $250,000 exclusion to avoid capital gains on the entire sale and then gift you all back the relevant proceeds and escape tax yourselves, because that is the only reason I can see for that suggestion.  I'm not sure that would work, depending on whether she was also on the deed for the last five years.  Doesn't the exclusion require that the seller have owned and occupied the home for at least two of the last five years to qualify for the exclusion?  She may have occupied it as her primary residence, but unless she was also on the deed I don't think she would meet the ownership test, so could not get the exclusion.  Are there other relevant details I am missing that would impact the answer? 

ETA:  Technically, I guess it could be a benefit if she were subject to a lower capital gains tax than the rest of you due to lower income.  There would be no exclusion from capital gains but still a much lower rate paid on them.  Either way, I think I would agree with keeping it clean and avoiding even the appearance of tax evasion.  Not worth the risk.  

SM has no issue, she has lived in the house so this does not affect her in the least, especially considering the sale price of the house.  She has lived there.  She has no capital gains.

Our accountant threw out that me and my siblings quit claim the house back to her as she would pay no taxes, and trust that she would disburse our shares as a gift.  THAT was my question, not the stepped up basis of the house.

My question……is there anyone you would trust to do this if you were faced with this situation?

[minnesotapaintlady]

$1500 in tax savings doesn't seem worth the risk to me considering her history.

But, yes, I would trust a few people to do this.  Pretty much limited to any of my parents/stepparents or my aunts, but they're all well off, good with money and I know they wouldn't try to screw me over.

[tallguy]

I had an informal agreement within the family that worked, but I was essentially in control of it so not the same situation as yours.  I tend not to trust others with my money, so if there is in fact someone in my life to do this with the number of those people would be VERY low.  If the person is not good with money in the first place then no, I would absolutely not do it, even if there were not any risk of tax evasion involved.  So no, I would not do it if I were you.

I don't think the fact that the SM has lived there is relevant unless she was also on the title these last few years.  She would not have any gains on her portion if she inherited it, but should probably have gains on your portions if you all were to do this.  Those gains may or may not be taxable depending on the amount and on her other income, but they would likely be at a lower rate.  It may not be your question here, but it should be clarified and taken into account, both from a monetary standpoint and a potential fraud standpoint, to even consider the idea.

[pulmonarymd]

Nope. This sounds like a situation where the amount of money saved is not worth the potential consequences.The amount left over after taxes is still more than you have now, and is risk free otherwise. Not to mention I would not risk the consequences of being investigated for tax fraud if things went south. But I am generally risk averse in these circumstances

[The Walk of the Penguin Mich]

Aug 2, 2021 12:41:03 GMT -5 tallguy said:

I had an informal agreement within the family that worked, but I was essentially in control of it so not the same situation as yours.  I tend not to trust others with my money, so if there is in fact someone in my life to do this with the number of those people would be VERY low.  If the person is not good with money in the first place then no, I would absolutely not do it, even if there were not any risk of tax evasion involved.  So no, I would not do it if I were you.

I don't think the fact that the SM has lived there is relevant unless she was also on the title these last few years.  She would not have any gains on her portion if she inherited it, but should probably have gains on your portions if you all were to do this.  Those gains may or may not be taxable depending on the amount and on her other income, but they would likely be at a lower rate.  It may not be your question here, but it should be clarified and taken into account, both from a monetary standpoint and a potential fraud standpoint, to even consider the idea.

She is, as I said in the OP where we could quit claim the house to her and trust her to do what my dad wanted her to do.

The point is not cost basis, or who is going to be taxed how much, but would you trust someone to do this?  We have already decided that we aren’t going to do this to avoid capital gains on the house, so this is not the point either.

All this does is show what shitty lawyering will leave in the wake.  

[The Walk of the Penguin Mich]

Aug 2, 2021 13:12:26 GMT -5 pulmonarymd said:

Nope. This sounds like a situation where the amount of money saved is not worth the potential consequences.The amount left over after taxes is still more than you have now, and is risk free otherwise. Not to mention I would not risk the consequences of being investigated for tax fraud if things went south. But I am generally risk averse in these circumstances

What is frustrating is that it didn’t have to be this way.  This is all bad advice from a lawyer and my dad being naive enough to think he was doing the right thing.  

He has received soooo much bad advice in the last 20 years.  I don’t know if it is because there are only crappy professionals where he lives, or he has a particular affinity for using a friend of a friend.  Same with medical treatment.  

[Mardi Gras Audrey]

Leaving the tax issues out of it... there are a few people I would trust with something like that (where u are giving up control and hoping they do things honestly). My parents, my brother, and my uncles and aunts. Very honest people and true believers in you live up to your word and can do things in a handshake deal. Also, my 2 best friends (known over for 30 years, the other for like 25). My DH of course and most of his family can be trusted and u don’t have to worry about them cheating you

[daisylu]

There are 5 people that I would trust to do the right thing - DH, my parents, & DH's parents. Though if the savings were minimal to me I would not bother putting any of us in that situation.

[wvugurl26]

I would trust a few people. DH's parents, my dad, my grandma on dad's side, my brother and one aunt/uncle.

The rest hell no. And I would not in the described situation. It is unfortunate but at least you are aware of the tax implications.

[Bonny]

Aug 2, 2021 13:12:26 GMT -5 pulmonarymd said:

Nope. This sounds like a situation where the amount of money saved is not worth the potential consequences.The amount left over after taxes is still more than you have now, and is risk free otherwise. Not to mention I would not risk the consequences of being investigated for tax fraud if things went south. But I am generally risk averse in these circumstances

Agreed. The premise seems dodgy and if the shoe was on the other foot I would feel uncomfortable about even being asked to participate in some kind of scheme.

That said when my father got a little pension windfall I did consult with an elder law professional in order to manage that little windfall to keep him from getting kicked off of Medicaid. It was a pain especially toward the end with his dementia and crazy gf. I did get a little money from it when he died though. I could look at it as payment for the loan I gave my parents nearly 30 years ago which they defaulted on.  

But I would not trust my family to do the right thing. Too many issues, too many financial problems.

[pulmonarymd]

Aug 2, 2021 13:18:55 GMT -5 The Walk of the Penguin Mich said:

Aug 2, 2021 13:12:26 GMT -5 pulmonarymd said:

Nope. This sounds like a situation where the amount of money saved is not worth the potential consequences.The amount left over after taxes is still more than you have now, and is risk free otherwise. Not to mention I would not risk the consequences of being investigated for tax fraud if things went south. But I am generally risk averse in these circumstances

What is frustrating is that it didn’t have to be this way.  This is all bad advice from a lawyer and my dad being naive enough to think he was doing the right thing.  

He has received soooo much bad advice in the last 20 years.  I don’t know if it is because there are only crappy professionals where he lives, or he has a particular affinity for using a friend of a friend.  Same with medical treatment.  

Sometimes, as we see in medicine, people get bad advice because they seek out someone who will tell you what you want to hear. People doctor shop until they find that. I suspect it also happens in the legal field.

[Tiny]

Aug 3, 2021 9:45:40 GMT -5 pulmonarymd said:

Aug 2, 2021 13:18:55 GMT -5 The Walk of the Penguin Mich said:

What is frustrating is that it didn’t have to be this way.  This is all bad advice from a lawyer and my dad being naive enough to think he was doing the right thing.  

He has received soooo much bad advice in the last 20 years.  I don’t know if it is because there are only crappy professionals where he lives, or he has a particular affinity for using a friend of a friend.  Same with medical treatment.  

Sometimes, as we see in medicine, people get bad advice because they seek out someone who will tell you what you want to hear. People doctor shop until they find that. I suspect it also happens in the legal field.

And sometimes people "hear what they want to hear and see what they want to see" when they get advice.    

I have friends and relatives who "hear" and "see" things that I have no idea how they arrived at based on what they heard/saw or what common knowledge is available.    

(For example - a friend saw on the news that people were waiting HOURS in a line to get a Covid19  shot -  so therefore it would ALWAYS take HOURS of standing in a line to get a covid shot.  IT would never get faster or be different.      ::sigh:: yeah, not so much - we went thru the drive thru and didn't have to get out of the car - and it was less than 30 minutes from the time we entered the parking lot to the time we left the parking lot. )   

[The Walk of the Penguin Mich]

Aug 3, 2021 9:45:40 GMT -5 pulmonarymd said:

Aug 2, 2021 13:18:55 GMT -5 The Walk of the Penguin Mich said:

What is frustrating is that it didn’t have to be this way.  This is all bad advice from a lawyer and my dad being naive enough to think he was doing the right thing.  

He has received soooo much bad advice in the last 20 years.  I don’t know if it is because there are only crappy professionals where he lives, or he has a particular affinity for using a friend of a friend.  Same with medical treatment.  

Sometimes, as we see in medicine, people get bad advice because they seek out someone who will tell you what you want to hear. People doctor shop until they find that. I suspect it also happens in the legal field.

I have dealt with people doctor shopping with my hip groups.  

In my dad’s case, I think that he went to a friend of a friend.  In the last years of his life, the decisions he made were not so great and frequently cost him $$$.  My best guess is that he listened more to SM than us…..and her money skills are much worse than his.  He was of the generation to not as ‘why’ to professionals……and it always bit him in the butt.

[bean29]

I was just thinking about this, and it hit me that some people I could absolutely trust to "do the right thing" would refuse to be involved in something like this b/c it is essentially tax evasion, and therefore not "Honest".

I could trust my Mother, my Brother, my MIL, and my DH and DS and DD. 

[susana1954]

Aug 3, 2021 15:35:07 GMT -5 bean29 said:

I was just thinking about this, and it hit me that some people I could absolutely trust to "do the right thing" would refuse to be involved in something like this b/c it is essentially tax evasion, and therefore not "Honest".

I could trust my Mother, my Brother, my MIL, and my DH and DS and DD. 

 Yes, I could trust my ex, my son, and my daughter.  But they wouldn't do it.