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My father took out a $100,000 loan

Scorpio

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Father’s Day Moneyologist: My father took out a $100,000 loan to buy my sister a vacation home
By Quentin Fottrell
Published: June 18, 2017 9:21 a.m. ET







But he also gave the other sister $40,000 to buy a home in 1990



Dear Moneyologist,

My sister has been going through a divorce. Her husband made very good money, but they were both financially irresponsible and racked up hundreds of thousands of dollars of debt, including owing at least $150,000 to the Internal Revenue Service in back taxes for a business. They also bought a vacation home, but had to sell it recently because of the divorce.

My sister told my parents that she and her kids were crying about having to sell the vacation home. My 85-year-old father took out a home equity loan for $100,000 to give her a down payment on a new vacation home. This was all done without my being told about it. (My parents bought the new home in their name so it won’t be contested in the divorce.)

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This is all before the divorce is final; she has no idea how much child support she’ll get. In addition, she has one child in college and two more due to start in the next two to five years. She recently started working full-time, but even with a good salary and eventual child-support, she’ll still have to pay a sizable mortgage for her primary residence, plus the mortgage on the new vacation home.

My parents gave me $40,000 as a down payment on a small apartment nearly 20 years ago. I didn’t ask for it and it certainly didn’t require taking out a six-figure home equity loan in their old age.
Feeling Slighted

She’s never been financially responsible, always living far beyond her means. My parents have also been extremely generous to her children, paying for whatever my sister requests for them, including computers and international trips.

In fairness, my parents gave me $40,000 as a down payment on a small apartment nearly 20 years ago. I didn’t ask for it, but they insisted that they had the funds, and it certainly didn’t require taking out a six-figure home equity loan in their old age. Funds were extremely tight growing up, but in retirement they’ve managed to live comfortably until now. However, the large home equity loan in their old age will tighten their finances considerably, which I also resent.

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I was very upset that my sister would put such a financial burden on my aging parents, as well as the fact that there’s now a $100,000 home equity loan on the house, which is probably most of our inheritance. I realize that my parents can do whatever they want with their money, but I’m upset that this was done behind my back and at the inequality of the situation. I’ve expressed my extreme displeasure at the burden this puts on them, as well as the fact that they’ve always given my sister and her family more, when they were completely irresponsible financially, even with a very large salary. My parents have said they wanted to do this and that I’m being petty.

Am I justified in being angry about this?

Feeling Slighted in New Jersey

Dear Slighted,

Your parents gave both you and your sister financial gifts. She got $100,000, which is far more than you got when you were starting out. That’s true. She has two children, a husband on the way out the door and, sure, she caught your parents at a generous —perhaps even vulnerable — moment. They didn’t want to see their daughter hurting. So they gave her a down payment for a vacation home, and put the deed in their own name. Your sister feels better and more secure. It sounds to me like you have pretty smart parents.

There is also a question of who got more money. Your parents gave you the $40,000 in 1990. You didn’t say no and, if your sister was upset with that gift at the time, she likely didn’t tell you about it. If she did, you didn’t mention it. If she didn’t, she might have figured that you needed it at that time in your life. She could have asked herself, “Is life fair? You know what? Life isn’t fair.” And then she would have gone back to her studies or on a date with the man she would marry, or whatever she was doing at the time.

There’s a lot your parents could have done with the $40,000 they gave you in 1990, which would be worth around $75,000 in 2016 dollars. Your parents could have even bought a second home for their retirement.
The Moneyologist

There’s a lot your parents could have done with that $40,000 in 1990, which would be worth around $75,000 in 2016 dollars. Your parents could have bought a second home for their retirement. The median house price was $118,400 in 1990, so $40,000 would have been a great start. Today, the median price is $306,700. That $40,000 would arguably not be enough for a down payment today. The S&P 500 hovers at 2,164 today, up over 600% from 306 in 1990. They could have invested that $40,000 in stocks.

Sibling rivalry and petty jealousy can masquerade as genuine concern for, say, our parents’ ability to retire or lead to thoughts like, ‘Haven’t they had to put up with enough?’ Both of those concerns may have basis in reality, but I’m cautious about taking one sister’s side over the other when both have received their fair share of their parents’ money. I’ve seen it before with a sister who felt that her unmarried sister was given preferential treatment by their mother. Sure, $100,000 is a sizable sum of money. But your parents may decide to keep the house in their name and leave it to both of you after they’re gone.

If you think your sister should decline her gift, and if you are that concerned about your parents’ financial welfare, maybe you should consider giving back that $40,000 too.

(This column was republished on June 18, 2017.)

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http://www.marketwatch.com/story/my...n-to-buy-my-sister-a-vacation-home-2016-08-05
 

southfork

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40k worth 75k today, and they still beat the no inflation drums, almost doubled, so whos pay has almost doubled in that time?
 

edsl48

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I see assorted issues with this. The two main ones are
1: These are most likely taxable gifts. Was a Gift Tax return filed? There is no statute of limitations on a non filed return and the IRS does quite well picking up delinquent taxes, penalties and interest on non-filed gift tax returns that often exceeds the amount of tax had the returns been filed timely. Granted the new house is in the parents name but the 40,000 is, from what I read, a done deal. The other house though when transferred will be a gift
2: There may be medicaid issues if the parents have to go into a nursing home and are expecting medicaid to pick up the tab. In Illinois there is a 5 year look back period where the assets can be recovered.
I would like to think that the individuals having assets to give away could afford competent tax advisers but, on the other hand, writing to a public news agency for financial advice makes me think maybe not.
 

Agavegirl1

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1. If the title was not put in the sister's name, there is no gift and therefore, no gift tax. In addition, the gift tax is assessed on donor. They can exclude gifts under $14,000. Anything over that must be reported on form 709. It doesn't sound like this is required here.

2. Absolutely. Medicaid can only come into play after a "spend down" to a very limited amount in assets. Medicare does not pay for Nursing Home Care. The parentals can keep a limited amount of cash, other assets and a prepaid burial account in order to get Medicaid to pay for a nursing home.
 

edsl48

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1. If the title was not put in the sister's name, there is no gift and therefore, no gift tax. In addition, the gift tax is assessed on donor. They can exclude gifts under $14,000. Anything over that must be reported on form 709. It doesn't sound like this is required here.

2. Absolutely. Medicaid can only come into play after a "spend down" to a very limited amount in assets. Medicare does not pay for Nursing Home Care. The parentals can keep a limited amount of cash, other assets and a prepaid burial account in order to get Medicaid to pay for a nursing home.
The problems of online issues etc.
The gift I meant to refer to is the amount of the 40,000 given to the one individual and as to the house regarding the other issue you are correct that there will be no gift tax until the title transfers.
Regarding the other issue keep in mind, that until title transfer occurs, the house et al will be subject to the usual "look back" rules regarding medicaid.
Therefore I maintain there are assorted issues with the situation requiring planning that is not generally found on internet chatboards
 

Agavegirl1

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The problems of online issues etc.
The gift I meant to refer to is the amount of the 40,000 given to the one individual and as to the house regarding the other issue you are correct that there will be no gift tax until the title transfers.
Regarding the other issue keep in mind, that until title transfer occurs, the house et al will be subject to the usual "look back" rules regarding medicaid.
Therefore I maintain there are assorted issues with the situation requiring planning that is not generally found on internet chatboards
I had hoped my post would point out the validity of your point. I hope you are not offended. None intended. You are correct. It does not seem as if the goal is a "spend down" here due to no change in title. The titles if the father dies intestate, will go to the wife. Lookback rules do apply. I believe our state has a shorter one.
 

edsl48

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I had hoped my post would point out the validity of your point. I hope you are not offended. None intended. You are correct. It does not seem as if the goal is a "spend down" here due to no change in title. The titles if the father dies intestate, will go to the wife. Lookback rules do apply. I believe our state has a shorter one.
Offended? Oh heavens no! What I hoped to show was some of the issues regarding looking for quick answers on newspapers et al on some very complex and important issues. To expand on this I think many of today's so called "financial planners" are dangerous places to go to seeking answers. At the same time the public media is even more dangerous because the full situation and background of the situation, as demonstrated in the original post, can not be condensed into a few sentences.
On a side note I once was privy to an annual training program offered by the IRS to its Agents. At the start of the program a complex tax problem was offered for solving. Interestingly there were no two answers that were the same. The consensus was that each Agent took a different approach because of certain assumptions that they made in solving the problem. Similarly I believe Money Magazine does the same thing with tax professionals and it too has an assortment of different answers based upon certain assumptions made by each of the professionals.
My point is Taxes, Medicaid and related issues are highly complex and need to be fully explored in a way that can not be reduced to a few lines of print. I should add regarding the unlimited statute on unfiled gift tax returns is a gold mine for the IRS. The Estate and Gift tax agents are always on the lookout for them and they seem to pick a lot of them up. Amazing how individuals are not even aware of the situation till hit squarely in the eyes with the situation.
 

Agavegirl1

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Agreed on the complexity. My career was health care finance. I was the CFO of a number of hospitals with attached nursing homes, all non-profits. Our social workers pushed the spend down. Gifting, prepaid burial accounts, divestiture (why?), they did not suggest irrevocable trusts or other such money shelters. Financial planners and lawyers push family irrevocable trusts. Insurance agents push long term care insurance. Investment advisers suggest Roth IRAs etc. etc.

Now, I do taxes. I have a research department for complex issues. They will support any decision they recommend so I am not on the line. We don't call the IRS. I'd get as many answers as calls I make.

No issue is as simple as a letter to a help site. There is always more to know. Thanks @edsl48