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How to Divide House Fairly Between Three People in an Estate Plan?

Attorney Thomas B. Burton reacts to a real estate planning question about how to divide a house fairly between three people inside of an estate plan. In this Real Attorney Reacts series, Attorney Burton once again analyzes a question that was submitted to the Moneyist columnist, about a grandmother who wants to leaver her home to her three grandchildren. One of the daughters wrote to the Moneyist columnist seeking advice about the best way to accomplish her mother's estate planning goals. Attorney Burton reviews this question and provides advice and analysis under Wisconsin law, as an estate planning attorney, of how he would approach this question and some of the options he would lay out for the grandmother if she were his client.

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Hello and welcome back to Real Attorney Reacts.

I'm Attorney Thomas Burton and this is the series where I respond to Real Reader Questions and I provide advice and analysis of the question under Wisconsin law.

So today's question again is a question submitted to The Moneyist, columnist, it's a columnist with MarketWatch and I was reading the column recently because many of the questions deal with personal finance and they often delve into estate planning issues. So let's get right into it.

Today's question, "My mother wants to leave her home to her three grandchildren. I have one child and my sister has two. Is that fair?" and I'll read what the letter says here, "My mother plans to leave her house which is paid in full, to me and my sister. This had already been addressed with her will. However, she ultimately wanted to go to her grandchildren. I have one child and my sister has two children. As it stands now, my sister and I will each inherit 50% of the house meaning my child will inherit my half and my sister's kids will get her half. My daughter is 12 years of age and my sister's kids are age 16 and 19".

Okay, so right here, you can see, we have two, who are minors under 18 and one who's 19, in many states, the age of majority is 18. So the one who's 19, would be legally an adult and the other two are minors.

"We know our mom's intention is for the kids" and I should note a minor cannot legally inherit property under the law, until they reach the age of majority in their state. In Wisconsin, at age 18. She doesn't say what state she's in. "We know our mom's intention is for the kids to equally have part of the home. Does that sound fair to you? When the house passes to us, what do we need to do, so that the kids each get one-third of the house. My husband and I have an estate plan but my sister and her husband do not".

So this reader is thinking ahead and I think it's very good they reached out for advice. So The Moneyist response and I'll just give you excerpts of what he said, "Dear daughter, inheritance family homes and sibling rivalries often create a toxic cocktail that leaves family members and lawyers with headaches for years to come", my aside that's very true and he calls it the troubled teeny served straight up with a twist. "When it hits, all hell breaks loose and people use every slight and anger at parental favoritism as a cudgel in ensuing legal battles. They are the spoils of a thousand dinner table wars." I enjoy this columnist because he's quite the writer and paint the vivid word picture here. "I say that not to alarm you but to thank you for being one of the few people who respect their mother's wishes and want to see them fulfilled. Many people would grumble over what life owes them, deciding to do one thing while their mother is alive and doing something else entirely when she's gone. In many ways, this is a perfect post thanksgiving letter, thank you". So now he says, "It is fair and thoughtful of your mother to see that one third share of this home would likely help her grandchildren, immeasurably in life either to buy their own home or further their own education or both. My suggestion is to leave it in a trust for when they all turn 21. So when your daughter turns 21, the three cousins can decide what they would like to do with the home".

So I think that's very good advice. Like I said, in some states the age of majority is 18. In Wisconsin, it is 18 but you can hold property for a minor under UTMA - the Uniform Transferred to Minors Act, up to the age of 21. And in my opinion, 18 is often a little young, to leave people property. There's research showing the brain is not fully formed for a lot of people until they reach age 25. So 21 in my opinion, if you're going to pick one of those lower ages, is a better age and it also allows them if they're going to pursue higher education or something like that to have done a couple of years of that after they turn 18.

He also says "the internal revenue service would allow you to gift your niece/ nephew payment toward their tuition and medical bills as long as you pay them directly to the institution but you may find yourself in the crosshairs of a gift tax. If you want to pass on the proceeds of the sale of this house to them. Similarly you and your sister could agree to add your children to the deed using a quick claim".

Okay, so he's giving good advice here but about what can happen if they just allow the, if the grandmother really wants the house to go to the three grandchildren, I agree with him, she should do that directly inside her will and skip her two daughters. She should just have it go to the three children and I would do it in a trust and have it be held until the youngest reaches the age the grandmother feels appropriate.

Now the other thing to consider is the writer in their letter didn't say what the grandmother wants them to do with the house. If the intent is they sell the house and get cash from it, then they could use that for their education like he says but maybe she wants them to have the house for some other reason. They don't say, it could be a vacation property and she wants them to inherit it and enjoy it for years to come. In that case, I would set up the trust to provide ongoing management of the house and ideally leave some money to the children to help manage the property at least while they're younger because the property taxes, maintenance and upkeep can be significant but judging by his response, it seems like he assumes it's to be a gift to them to sell. So assuming grandmother isn't thinking, I want to keep this house in the family forever, then setting it up that they received their share at 21 as he said and they could sell the proceeds and use the cash for their needs, is a good idea.

Now I agree with him cautioning about leaving it from grandma to the daughters because then, if the daughters want to get it to their kids, they just have to turn around and gift it to them and like he's saying, that would use up their gift tax. So every person gets a lifetime exemption, currently it's around 11 million dollars per person but we call that a unified, the gift tax is unified with your lifetime exemption. So let's say, this house is worth $200,000 and the one lady in this instance wants to leave it to her one child and essentially let's say, her mom dies and the will leaves it to the daughter and the daughter turns right around and gifts the property via quitclaim deed to her daughter. Well she suddenly gave a $100,000 gift in one year to her daughter and remember the gift tax limit is currently $15,000 per year, per person. That's the limit you can give someone without filing a gift tax return. So if she did this via quitclaim deed, after her mother passed, she'd have to immediately file a gift tax return and deduct a $100,00 as giving to her child from her lifetime exemption.

The point is why do that when grandma can leave it at death and use up part of her lifetime exemption? Now I don't know how much money she has but from the way this is worded, my guess is she's not close to the 11 million. So it's better for her to leave it directly to the grandkids, they get it as a gift upon her death, tax free and they would also inherit it at the step up in basis. So for real property, the basis of the property is the price you pay when you purchase it and if this is a grandmother, I'm guessing she bought it years ago when it was worth significantly less money. So when she dies, you can get an evaluation of the property and I recommend you get an appraisal and that new value then becomes what we call the new basis upon death for the heirs and that's what's so powerful about leaving property especially, appreciated property like real estate at death. It would allow these grandchildren to get new bases upon death, then if they went to sell the property as The Moneyist column is contemplating, they could sell it at that inherited basis and likely pay very little to no capital gains on the sale if they sold it within a year you know, pretty quickly after her death, it's likely they would owe no capital gains because their basis upon her death would be the fair market value and they'd likely sell it for around that.

So his option of adding him via quitclaim deed, I don't think is a good one and I'll read the rest he goes on to say, "however I do not recommend that as a course of action here, siblings fall out, nieces and nephews get into trouble as do their parents and the goalposts can shift at a moment's notice without warning. If your mother wants her three grandchildren to receive equal shares of her home, it's cleaner and safer to make that clear in her will with provisions that they only inherit this home when they reach a certain age. Not every family will be as supportive, fair and loving as yours."

Okay so I feel overall he gave her a great answer, great advice, especially for not being a lawyer. He's a personal finance writer but I will point out at the end, he mentioned doing it through her will and I liked it earlier, when he said to do it through a trust. If I was advising this grandmother, I would tell her if you really want this property to get to the nieces and nephews, without significant time delay and hassle, let's avoid probate court altogether and not do it through your will. Let's do it through a revocable living trust. We'll deed the property into the trust. Now you pick the ages you want the children to receive the inheritance, so it can be 21 or in many trusts, I set up I suggest, they receive their inheritance in three portions, that gives them three bites at the apple. So for instance, they could get one-third at age 21, one-third at age 23 and one-third at age 25 and the other beauty of this approach is often, if someone is pursuing higher education, they're in that ages, in those early 20s and this keeps the property in trust for them instead of the money going into their account because when you're going to college, often any assets in your own accounts, count against you, if you qualify for any sort of federal, financial aid or scholarships. It's better to have the property owned by someone else in this case hold it in trust. So I would talk to the grandmother about the goals of the grandchildren but if education is on the horizon for one of the three, that would be a good way to do it. Then she could pick the ages, they'd receive their distributions and you could name one of the children as the trustee of this trust. I'm saying one of her children or you could name both daughters as co-trustees of the trust to administer the property because one of the children is 12, so they have quite a few years until they will be age 18 or 21 in this scenario and I again, I liked when The Moneyist said, to leave it to them through a trust and instead of doing a trust inside a will which would still have to go through probate court, I would advise go straight to the revocable living trust, set it up, avoid probate on all your assets and as a bonus, you can avoid probate on your personal property as well because the reader mentions that in the will, it's set up to inherit half but even if the grandmother did nothing, this would still mean the daughters would have to go through a time consuming and often expensive probate court proceeding, to get the house.

So in short, I think this is a great question because the family and the daughter is looking ahead to try to avoid disagreements about this later and I would encourage her to work with her mother to work with a qualified estate planning attorney to set up a plan, to make sure that her mother's wishes are followed in the most tax efficient and advantageous way possible to ultimately get this inheritance to the grandchildren.

So that's today's Attorney React Series, watch for more in this series in the future. If you have a question you'd like to see answered on a future episode of either this series or my popular Question and Answer Series, feel free to submit it in the comments or directly to the office and we'll get to it as soon as we can.

Thanks for watching and we'll see you next time.

© 2021 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.


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