Dear Quentin,
I am a 56-year-old man living in my family home with my father, 93, who has Type 2 diabetes and a pacemaker and is legally blind. My mom passed away five years ago. He is in good health otherwise, and well taken care of. Because of his blindness, he needs round-the-clock care. My girlfriend of 10 years lives with me, and she helps. We are his caregivers.
I also have a sister, whom I just set up with an apartment for which people wait years to even get on the waitlist. I was able to get her in based on my connections with the management. She is a spendthrift and has not worked for years, and while living with my father prior to my taking over, she spent thousands of dollars of his money.
Last April, my sister racked up $ 20,000 on our father’s credit cards, and tried to take upwards of $ 13,000 from his bank account. She wrote two checks — one for $ 8,000 and one for $ 5,000. Luckily, the bank did not cash the check for $ 8,000. What we want is for him to quitclaim his home to me to help my sister and me. My father will live here until he passes.
Upon his quitclaiming the house to me, I would own it outright and get an immediate home-equity loan. I plan to purchase a lump-sum annuity for $ 200,000 with a 20-year time period, which would give my sister approximately $ 1,400 a month in addition to her Social Security Disability Insurance. We would then split the balance of my father’s estate — $ 100,000 each.
Here are my questions regarding my father’s house: What is the best way to go about this? I own my own business, and I can’t get a home-equity loan until I take over my father’s house. I’m looking for some expert advice on how to get this done. Thank you in advance for any help and/or advice you can provide.
The Son
Related: I want my son to inherit my $ 1.2 million house. Should I leave it to my second husband in my will? He promised to pass it on.
“Choosing to do your own version of a reverse mortgage by leveraging the equity in your father’s house to provide income for you and your sister today seems opportunistic and foolhardy at best.”
MarketWatch illustration
Dear Son,
This is a terrible idea. It’s a terrible idea for you, for your sister and for your father.
Say your father quitclaims this home to you now, while he is still alive, and you sell the home. You will have to pay long-term capital-gains tax on the property, if or when you sell it, on the price he paid for the home rather than on the value of the home when you inherit it. This is called a “step-up in basis,” and you will lose that tax advantage by quitclaiming now.
If your father quitclaimed his house to you and it was worth $ 1 million upon his death, an appreciation of 100% on the purchase price, you would be required to pay capital-gains tax on the original purchase price ($ 500,000) to the Internal Revenue Service, if you sold the property. With a step-up in basis, you’d pay capital-gains tax only on appreciation above $ 1 million.
Furthermore, you are proposing taking out a home-equity loan on a property in order to purchase a $ 200,000 lump-sum annuity over 20 years. With interest rates hovering at over 6%, you are facing at least $ 1,200 a month in repayments. You’re putting yourself into debt to buy this annuity, effectively robbing Peter to pay Paul.
Research has shown that people don’t always act prudently when they take out a lump-sum annuity. Some analysts refer to this as the “lottery effect.” According to this survey by MetLife, one in five retirement-plan participants who selected a lump sum from either a defined-benefit or defined-contribution plan say they depleted it, and ran through their money in 5.5 years on average.
The price of your father’s care
Another problem: Your sister has proven herself to be untrustworthy, by your telling — someone who will fritter away money given to her and ask for more. Or, assuming what you say is true, she might just take what she wants, regardless of the consequences. Why are you going through these financial gymnastics? Is it for her? Or for yourself?
The other issue casting a shadow over your desire to plunder your father’s house for money even while he still lives there: your business. Carefully examine your motivations for making such an extraordinary move while your father is still alive. What if you fall on hard times and the bank forecloses on the house? Where will your father live then?
Children usually inherit their parents’ property after their last parent has passed away; choosing to do your own version of a reverse mortgage by leveraging the equity in your father’s house to provide income for you and your sister today seems opportunistic and foolhardy at best. Let your father live the remaining years of his life in peace.
Your father has been fortunate to have you and your girlfriend taking care of him these past few years, given his multiple health issues, but what is the price of this care? What if you can no longer take care of him and he needs to be admitted to a long-term-care facility, or he requires professional medical assistance?
His house is his one source of income and stability. Please don’t take that away from him.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
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Previous columns by Quentin Fottrell:
‘She’s obsessed’: My mom moved into my house and refuses to move out. She has paid for repairs and appliances. What should I do?
My parents want to pay off my $ 200,000 mortgage, and move into my rental. They say I’ll owe my sister $ 100,000. Is this fair?
‘I hate the 9-to-5 grind’: I want more time with my newborn son. Should I give up my job and dip into my six-figure trust fund?