How to structure will? Inheriting house with surviving relative?

Question

My mom is willing me her house when she passes away. Any suggestions on how to structure the will with specific provisions to allow my stepfather to remain after her death? My heart would like to let him stay for free but I doubt I can afford it and also, I’d like to make sure my interests and his are adequately protected in case this get “squirrelly” in any way. Thought about life estate but really unclear if addressing rent rate or rate index or something is a move people do. Any ideas?

I’d consider keeping it at a rental long-term or may need to sell it. Want to keep options open.

Chris Seveney · Answer

Recommendation: Get an attorney, put it in a trust. KKOS lawyers can set all this up for around $1000. I personally used them and have not died yet, so do not know if it works, but I think it will (and if it does not, not much I can do about it then I guess)

Rick Albert · Answer

Let's say the property is worth $300,000 and you own it with no mortgage.

If you do the cash out refi at 70% LTV (yes there are some that are higher), you can get $210,000. That allows you to buy around $630K-$650,000 and now you have two properties.

You sell, you keep $279,000 after closing costs and commissions. This money is tax free.

Using $250K towards a down payment (rest towards closing costs and rehab), that allows you to buy an $833K property, assuming 70% loan to value.

Both strategies work as long as the numbers make sense. This is also assuming you are sole heir to the property and no other parties are involved. If you are splitting it with family, then you are more than likely better off selling and going your separate ways.

Rick Albert · Answer

Another interesting option, but you will need to speak to the right professionals, is IF there is decent equity, you could do a cash out refi against the property and pay another property "cash" to offset the income to cover the new rental and this one. That would be a win-win. That way when your step father leaves, you haven't slowed down your investing journey.

Teri Feeney Styers · Answer

@Grant Vincent I think what your Mom needs to establish is a "life estate" as you mentioned. For the benefit of those who are unfamiliar: Mom can will the house to you; but the life estate is also recorded and you have to honor that much like you would have to honor a lease on a property you buy. The life estate will spell out the obligations of the step-father (taxes, utilities, insurance, upkeep - or even a base rent that you could use to cover those costs). Life estates generally terminate in two ways: the Remainderman (step father) dies or permanently moves out (like a nursing home). Once that occurs you are free to handle the property any way you wish. I am also a broker and sold a life estate property last summer. This is where it got messy: Mom willed the property to all her children. She allowed one son to live there with a life estate. The son ended up in a nursing home but refused to admit he was unable to ever come back to the home. The lawyers had to move with caution because he was becoming mentally incompetent and they didn't want to have him signing documents (malpractice). They were finally getting somewhere with having him declared incompetent when he suddenly died. There was probably a way to address that in the original life estate document (some sort of time limit for the abandonment). Obviously you don't want to kick step-father out just because he needs to stay in a rehab facility for a month or two after a hip replacement; but at the same time, this guy was never going to be able to live on his own again (and he had let the property deteriorate to a state that made it uninhabitable) and it took a lot of unneccesary time and money to work towards resolution. So you and mom go in with your eyes wide open.

Grant Vincent · Answer

Thanks. Yes, I understand that part. I thought I may have missed something. Was thinking leveraging inherited house and keeping it as a rental likely greater leverage than selling and using proceeds to buy other property/properties. So you expect greater benefit selling and buying other properties? Probably too many variables to make a blanket statement but might as well ask...

Rick Albert · Answer

I buy a house for $100,000. Now it is worth $500,000. If I sell, there are capital gains taxes.

When I die, my kid inherits the house at current market value and rests. Now that $400K gain isn't taxed when my kid sells. It is an amazing wealth building tool as an inheritance.

Grant Vincent · Answer

The step up basis part threw me. Can you explain more?

Rick Albert · Answer

Because of the step up basis, it likely makes sense to sell. Then you take the equity to buy a higher valued property.

Grant Vincent · Answer

@Rick Albert Solid suggestions! I like this idea a lot...assuming their financial house is in order. Also considered selling it to buy one or more other smaller properties and moving stepdad into one of those.

Rick Albert · Answer

1) Consult an attorney. This can get very complicated. I cannot stress enough how important having everything buttoned up by an attorney and recorded with the county is. If it isn't clear, then it can cost you a lot of money and time. Take care of it now.2) If you want him to stay, doing so for free only works if your mother has money set aside to pay for everything (like investments or a large bank account), otherwise it is out of your pocket. So maybe a structure where he covers all repairs and the bills just so it isn't your financial obligation. That can still be a win. He will likely keep the larger of the two social security checks plus everything else that is stated in her trust.

3) Keep in mind as you apply for loans, lenders will count this property towards your debt to income ratio. This includes property taxes and insurance. If you want it to zero out, then your stepdad will need to pay 25% above all the bills since lenders will count 75% of the rent coming in.

How to structure will? Inheriting house with surviving relative?

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