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August 19, 2010

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The only sure way to keep the real estate completely away from a divorcing spouse or spendthrift child is to put the real estate into a trust, with the children as beneficiaries.

I think she should really consult a lawyer on this one.
Doesn't seem like something to do on your own as its a bit convoluted. She'd want it to hold up legally so getting a lawyer to provide consult and write it up is the best bet.

I think that is something like this, you are talking complications and specifics enough that you need to get a lawyer. I have no expertise in it, but I think the houses would have to be in some sort of trust in order to bypass spouses and go straight to children? I believe once someone has inherited property, it is theirs to pass on as they see fit. However if a trust owns the houses, then full access could be given to direct descendants? Again - you will want to contact a lawyer.

She won't be able to keep the property from falling out of family hands forever. Her lawyer will of course know all about it (or can look it up if she needs a refresher), but most states go by what is called the Rule Against Perpetuities which basically allows one to tie up property in this way for only so long. If it's just a generation or two she's concerned about, a well-written will should do the trick. Any longer and the lawyer will have to get creative.

(I am a lawyer, but you should not rely on the above as legal advice. You should consult a lawyer licensed in your state.)

The comment above is correct... You should consult an Estate Planning Attorney to draft a Qualified Peronal Residence Trust (QPRT) or 2503(c) Trust.

The QPRT can be used to pass the property to heirs over a period of years and give the grantor current tax savings. This kind of planning can be un-nerving because the owner technically gives up current ownership of the property to the trust. At the same time, the Estate Planning Attorney can put in certain restrictions such as which family members have a right to a share (ignoring spouses for example) and how/if the property can be sold once the grantor dies.

The 2503(c) Trust is usually used to transfer property to a minor (grandchildren for example) and the grantor retains control of the property until the minor reaches adulthood. Then there can be restrictions on how/if the property can be sold.

If she really wants to do this, a good lawyer can definitely help her leave the property in trust for the grandchildren, granting the children rights to use it while they are alive. She need not give up control or ownership during her lifetime.

I hope for all of your sakes that you are a close family and stay that way for at least one more generation. The difficulty of fairly using, maintaining and ultimately selling jointly-owned property can quickly become a nightmare.

Somehow inheritances and wills seem to bring out the worst in people.

I have a brother whose father-in-law is trying to do something similiar in directing his property from his grave in complicated trust arrangements, not letting anyone ever sell it (except for the perpetuity restrictions mentioned above) (it's income producing property) and even trying to get the kids to be bound to pour the returns back into buying more land to produce more income (although I don't know that he is actually able to legally pull that requirement off). The kids are actually asking him not to do it for too long cause they would like to get some benefit out of it and not just have it all tied up for decades on end.

Your mom will do what she will do and probably can't be talked out of it, but what is the reason why its so important that these houses stay in the family? Is it sentimental? Do the kids want the houses? Is there atleast 2 people who plan to stay where ever those houses are and live in them? Cause regardless of how sentimental they are or whatever other reason she might have, houses that no one really intends to live in but cannot sell are a burden not an inheritance.

Unless there is a very good reason for trying to keep the physical houses from being sold my advice for her is to simply make the estate equally jointly owned by all the kids and then you can decide what do with them when the time comes.

If someone wants one you get it appraised and that goes against their percentage of the entire estate in order to keep that house. If everyone wants them you can keep joint ownership assuming you can pull that off without causing problems. If no one wants any of them you sell them and split the money. Keeping houses in an estate that no one wants does not make any sense.

"For example, she doesn't want an heir to sell the property to an outside party unless the family agrees, and when her children passes away, another child or grandchild should get the property, not the child's spouse."

Have no doubt she can work this out, but does she really want this? Sounds very encombering and also a pretty divisive way to gift. I dont see how controlling from the grave could be better than just dividing up the properties and putting the faith in whom it is given to. But maybe we're talking about legacy type money or hated current son-in-laws, then I guess I get it.

I'm not an attorney, but I've seen several of these situations throughout my career. In this case, the two goals are somewhat countradictory. I don't think you can split the property fairly (in who's opinion?) and keep it in the family (who's definition of family?). I repeat what everyone else said and particularly agree with Frank, that this might bring out the worst in people. (I hope this doesn't sound insensitive, but your mother seems to want to control the family from the grave. Wouldn't she just like to be remembered as thoughtful and generous?)

Please, she should go to an attorney; but see if "who wants what" can be ironed out beforehand. One situation in which I was closely involved, one sibling wanted money, the other wanted to farm the land. The land was "sold" to the farmer by giving a note payable for the non-farmer's portion, and the money and residual note was willed to the first sibling. Most of the transfers were acocmplished before death with an attorney's help; so far, everyone is happy.

Good luck.

Hi, I am the person who posted the question. There are a couple of reasons we are concerned about keeping the property in the family.
1. Some of the heirs have had financial troubles, so the goal is to protect them from potential creditors (or themselves, depending on your perspective).
2. There are 3 main heirs and one has a child who is just entering adulthood. 4 people, and 2 houses that some of us are sentimental about because this land has been in the family for 75+ years. Who should get the houses and who should just get land? Over the coming years it may be that one person or another would benefit most from the house.
3. One heir lives far away and is married to someone we don't trust. The spouse seems to look for ways to live without working (cheating on taxes, faking disability, suing people). We don't want the heir's spouse to force the heir to sell the property just to continue this irresponsible lifestyle. The land is rural and undeveloped, and we're afraid we'd end up with neighbors we don't like. (Cars up on concrete blocks, that kind of thing.)

We have consulted with a lawyer who also recommends a trust, and it seems like most everyone here agrees. Thanks for the suggestions!

@Barry,

Thanks for the extra details, that makes the issue much more clear.

Given those goals, which seem reasonable due to the circumstances you describe, the trust seems like the only way to accomplish those goals.

I suspect you can also have the trust setup with some kind of rules that say the trust can be overridden or dissolved prematurely and the assets distributed if you have 100% approval of the trustees or something along those lines. This would allow the encumbrances of the trust to be removed if the circumstances you described above were to change for whatever reason.

Good luck.

Sounds like a family farm.

"Some of the heirs have had financial troubles, so the goal is to protect them from potential creditors"

I think that could probably only be accomplished via a trust of some sort. If you own property outright via inheritance then I don't see how a simple will can protect it from creditors.

Sorry, but I have to disagree with this statement below.

"Some of the heirs have had financial troubles, so the goal is to protect them from potential creditors"

Let's see ... family member flaked out on paying back their obligations so let's make sure we setup something to ensure they never have to be responsible. What happened to the old fashion value of paying your debt ? Yes, I know I'll get hammered for this comment ... but in my opinion this is why America in it's current state.

dd, I see your point, but the grandmother in question here just wants to make sure her property stays within her family.

I'm with Jim (2nd comment) and Sarah (3rd comment)on this one.

This person really ought to see a lawyer. There is no substitute for 1 to 1 professional advice. This might sound uncharitable, but trying to do things on the cheap is merely looking for trouble.

Its possible to put anything in a will. Granny is setting everyone up for future problems. Who can know what the future holds for this family. Some may want the property but may not be able to afford it. Use your imagination, anything can happen to break up the harmony that is needed to make this work. Better yet ask the heirs who wants what and go from there.

Sorry to be negative, but now that we have the explanation (two siblings don't trust the spouse of the third, and at least one of the three would probably "waste" their inheritance because they are prone to "financial troubles"), I am even more convinced that these three people will not be on speaking terms within a few years of the death if they proceed with this plan.

After seeing a few nasty cases, I am more convinced than ever that a simple division of the estate into three is the only way to go.

Anything else will lead to recriminations, accusations of favoritism, and possibly even a lawsuit asserting undue influence on the elderly relative.

If one loves the house so much, they can buy out the others using their share of other money, or via a mortgage (or if the other two want to lend the money - which I doubt in this case).

(Barry again)

>Let's see ... family member flaked out on paying back their obligations so let's make sure we
>setup something to ensure they never have to be responsible. What happened to the old fashion
>value of paying your debt ?

Well, it's hard to argue with that. I'm the most fiscally responsible in the family and have tried to reform my siblings with mixed success. Realize that the trust also prevents some of the irresponsible behavior in the first place, because nobody can use it as collateral for a loan. I hope that post-financial crisis, banks will not loan money to people who can't afford it, but can we really count on that?

Re: Suggestions that splitting the property now will avoid arguments down the road -- my question was because of some problems already:
- The heir with the untrustworthy spouse has said, "I want at least part of one house or nothing at all." That sounds like a false ultimatum or a threat already.
- A grandchild has hinted if he got one of the houses, he'd sell it so he could blow the money.

This whole situation is really uncomfortable for me. I like the way I run my own financial life but this situation is forcing me to really confront the way other family members live. And I'm afraid that neither option (split it now or create a trust) ensures family harmony down the road. But we'll muddle through, that's what family is all about!

Well Barry...sounds like you have a good head on your shoulders. It's going to be very hard to keep peace in the family after your mother goes. I wish you the best of luck. As for the one that says he wants "at least part of one house or nothing at all." Give him what he wants... ie. nothing at all.

@Barry: If you want harmony down the road, you need to let each of your siblings screw up their lives in their own unique way - and love them anyway! No reforming your siblings via manipulation of the inheritance!

You probably have two main objectives:
1. Don't waste/lose/squander the inheritance
2. Be fair to all heirs.

The problem is that your idea of "waste" is different from theirs. One probably thinks that blowing it all on a fast car and a big party is not waste. You feel otherwise.

On fairness: If you go through with this without their buy-in, they are going to feel that you have manipulated your mother into doing things your way. They may feel cheated, and jealousy will rear it's ugly head and there will be a LOT of arguments and heartache down the road. Watch for accusations of being the favored son, etc., etc. Even if it is financially "fair", they will feel it is emotionally unfair.

Good luck!

Barry:
My wife and I are in our mid seventies, have a large investment portfolio and two pieces of valuable real estate. We were thinking of leaving our estate to a charitable trust that we both like but the current great recession and the very cloudy future of America, as we see it, has made us change our minds. We now intend leaving everything to our three children and a couple of bequests to two grandchildren. The charitable foundation is still in our will and trust but only as a last resort.

We paid $2,400 to have a will and living trust drawn up that takes care of our estate exactly the way we want. We do NOT just split everything up equally into three equal parts - that would not work for us at all.

We made the most responsible, best educated, most financially secure, most frugal, and most compassionate child, our executor and she receives our home and all of its contents as well as our investment trust account since she will also have to pay our estate's inheritance taxes which will be considerable. She is the middle child and is now 50. For example if her sister were to be able to obtain the contents of our home we know that our most precious and sentimental items would end up being sold for a pittance at a garage sale or on eBay, so we have ensured that it will never happen.

One important issue that has to be spelled out precisely when leaving anything to one of your children is what happens if they pre-decease their spouse. In our case, surviving spouses receive nothing - nada - zero.

Our son gets the other piece of real estate since we allowed him, his wife and young daughter to live in it rent free several years ago. Our son is very responsible and has a great career. His wife, is another story, she has never worked, and has shown zero gratitude to us for everything we have done for them. In the event that our son pre-deceases his older wife she is allowed to continue living in the property while paying its expenses only until our granddaughter is 21, at which time the granddaughter receives the property.

Our IRAs, which are quite large are proportioned between our son and our other daughter. The end result is that the three children DO receive almost equal shares of our estate in terms of dollars but we certainly have not created an undesirable and contentious outcome by just dividing each asset into three equal shares. One son-in-law is currently going through that as the executor of his father's estate and it is turning into a big argumentitive mess and should be avoided if at all possible.

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