Dear Liz: My mother left her house to my brother and me. He wants to use it as a rental property. I have no interest in being a landlord or in ownership. He doesn’t want to buy me out, so I’d like to sell my half interest. What are the tax issues I need to prepare for, and does my brother need to sign any documents?
Answer: You should first prepare for an ugly family feud. If the property hasn’t been distributed yet, you’ll face a probate or trust contest over the house, says Jennifer Sawday, an estate planning attorney in Long Beach. If you’ve already inherited the home, you would need to go to court to file a real estate partition action. Either way, a court action typically forces a sale or arranges for your brother to buy you out before dividing the proceeds — minus all the attorneys’ fees, of course. (This is not a do-it-yourself situation, so you’ll both need to hire lawyers.)
That may be the best of bad options if your brother won’t see reason. Being a landlord involves considerable hassle and liability. You shouldn’t be forced into such a business — or any business — with a family member.
You can use the threat of legal action as a bargaining chip, since you both will net a lot less from your inheritance once the court gets involved. It makes much more sense for your brother to agree to a sale or get a mortgage to buy you out. Let’s hope he comes to that conclusion as soon as possible.
Pension annuity beats lump sum
Dear Liz: I am 63, recently retired and have a choice. I can take a lump sum from my pension at age 65 or a monthly annuity. I am strongly leaning toward the lump sum. I know the pitfalls (I won’t be an aggressive investor, I don’t gamble, I won’t loan to family or friends, etc). My reasoning is that if my spouse and I both die before our early 80s, “they win.”
I do have relatives who live a long time, however. I am financially very careful and believe interest rates in five years will be several points higher and I can invest the lump sum conservatively and get a 5% to 7% return, and that will work for me.
Finally, I could take the monthly annuity now with no survivor benefit and at the same time buy term life insurance to cover my wife if I go. Am I missing anything significant in my favoring the lump sum?
Answer: Yes. Quite a bit.
Calculating break-even points can be an interesting math exercise, but you’re making assumptions about inflation rates and market returns, as well as life expectancies, that you can’t actually know in advance. A better approach might be to consider what could possibly go wrong. The answer: a lot.
Technically, you might do better investing the money than collecting the annuity, but there are so many ways you could wind up losing. You could pick the wrong investments, or the markets could turn south for an extended period. You could be defrauded or become the victim of an unethical advisor.
(Sure, you’ve got all your marbles now, but who says you’ll keep them? Even the smartest people can get fleeced, and any cognitive decline over the years could make you a sitting duck.)
The fact that you have longevity in your family is another big factor in favor of taking the annuity, because you can’t outlive the money. That should be a concern, in any case, because according to the Society of Actuaries there’s a 72% chance that one member of a couple will live to age 85 and a 45% chance that one will live to age 90.
If your spouse is a woman and not several years older than you, she’s likely to outlive you. Does she want to inherit the responsibility of managing this money?
Speaking of your spouse, get an independent, fee-only advisor’s opinion before you consider waiving the survivor’s benefit on any annuity.
A term life insurance policy may not last as long as you need it to, and will be expensive at your age. It will be vastly more expensive if you try to renew it down the road.
If you don’t or can’t renew it, your spouse could face a drastic drop in income at your death as one of your two Social Security checks goes away and the pension income stops. Surely, your partner deserves better than that.