Dear Monty: Why a partnership agreement is needed with inherited property
By Richard Montgomery
Reader Question: My wife and her three siblings inherited the family home when their mother died. My wife was 20 years old at that time, the eldest, and invested 10k in keeping the house. It is now 39 years later, and the siblings want their share. My wife is the only one who has remained living there and has paid over $700k in upkeep, mortgage, property taxes, etcetera. She also refinanced the home many years ago because each sibling wanted cash for personal reasons. My wife has paid all the interest and principal on these refinances. Another 250k was refinanced to care for their father. Again, my wife is the only one who paid anything. How does one divide the shares in this situation?
Monty’s Answer: Assuming your wife has been keeping good records on the costs and the refinances, here are some suggestions to consider going forward. Assuming the relationship between the siblings is positive, the goal might be to ensure they are still talking to each other after they reach a settlement. If each siblings percentage interest is in the title, there is still a long history here with conversations that were likely oral, and today, remembered differently. Whenever money is involved transparency and experienced counsel is often useful in keeping relationships intact.
Call a family meeting
It would be beneficial if the siblings could agree up-front on a plan to sort out and decide on how to proceed to avoid any misunderstandings. Create an agenda and appoint someone to take notes in the meeting. After the meeting send a memo of the discussion that includes the plan agreed upon to each sibling.
There is no mention of a partnership agreement established when the siblings inherited the house. It will be helpful If one exists. Was probate involved in transferring the title? The more detail on costs and timing you can furnish the less time a consultant will have to spend reconstructing a forty year history. The more uncontested data you can produce, the more unlikely you will encounter impediments.
Your wife’s training is unclear, but making the calculations on her own, she may overlook certain components. Has your wife been deducting mortgage interest on your income tax returns? An accountant will also be able to guide you with tax advice.
Seek outside counsel
Seeking competent advice that is outside the family can prevent future misunderstandings that change the family dynamics. Were the siblings named on the mortgage? Consider retaining a certified public accountant (CPA) to recommend the best way to approach the expenses, the payouts, and the refinances from the date the siblings received the title. It may be helpful to engage a CPA that is also an attorney. The CPA will know how to account for the periods of time all the siblings, including yourselves, lived in the home. With the amounts and the dates of distributions and shared expenses, or other items, the consultant may utilize time-value-of-money calculations. The accountant may have alternate ideas on the best methods for making these calculations.
Because the CPA is a knowledgeable outsider acting as a consultant, engage he or she to represent all of the siblings. Guidance on the calculations from an experienced accountant with no financial interest in the outcome will be very helpful in avoiding suspicion about the fairness of the results. Your wife sought outside advice because she is a fair person.
Consider exiting ownership together
It is not clear if you plan on continuing to live in the home. If you and your wife continue to live in the house, the siblings will need to establish a value for the CPA to use in making calculations. Should all the siblings contribute to deciding on the amount? If two appraisals are obtained and averaged (they will be different values) to set value, what happens if the estimates are far apart? Do you then get a third appraisal and average to two closest? Do you choose the two highest; the two lowest; the average all three? Determining the approach can be influenced by the motives and beliefs of each sibling. Also, if you stay in the home, should future selling expenses be considered in calculating the current buy-out price? By selling the home in a simultaneous exit the transaction may be less complicated because the market itself sets the value of the house as opposed to paying for and relying on appraisals.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Find him at DearMonty.com.