Question: My friend is in his last months or weeks of life, and I will be his trustee when he passes. It seems like a simple estate, really. Everything goes to a couple of friends and the rest to charities. The problem is, we have been spending his cash on his care. We may have enough for the rest of his life, but what if we run out? I also worry that when he goes and I step in to wrap things up, how am I going to pay expenses? The real estate brings in some rent, but not much. There are expenses like property taxes, insurance and his regular taxes that need to be paid. I am not even sure how to pay his burial costs and celebration of life. Any suggestions?
Answer: End of life care is insanely expensive and taking care of your friend with the assets he accumulated during life must always be priority number one. While you did not say it, my guess is that you have held off on selling real estate to avoid paying capital gains taxes. This is a common set of circumstances. When your friend passes, his assets will be appraised, and that new appraised value becomes the new cost basis. A subsequent sale after death should have minimal capital gains tax implications.
That still leaves you with the present conundrum of no cash but plenty of real estate. There are a couple of options to create cash while your friend is still living and avoid the capital gains taxes. You could speak with a bank to see if they would set up an equity line of credit on one of the properties which you can draw on for cash needs. Later, after he passes, you sell the property and repay the bank.
If a bank will not approve a loan or line of credit, you could seek out a “hard money” lender. These are private money lenders and, while the interest rates and costs for the money may be high, their qualification standards are much lower than a bank’s. Normally, if they can be in first position as a lienholder on the property and they know will be sold in the next year or two, they will provide cash. Then, as you would with a bank loan, when the property is later sold, the hard money loan is paid off.
You could consider approaching one of the charities that will benefit from the trust and see if something could be worked out with them. You could, possibly, set up a charitable remainder trust where a parcel of real estate gets transferred to the trust now, it is sold inside this charitable trust and your friend is paid an income stream for the rest of his life. At his death, whatever is left in the trust goes to the charity. Depending on his age, the stream could be generous. An added benefit is that when a property gets sold inside the charitable trust, no capital gains taxes are paid.
A bit riskier but worth considering is to do a lease with option to buy on one of his properties. In this case, a lessee/buyer agrees to buy a property at some point in the future and will lease it until the purchase is completed. The buyer puts down a substantial deposit and these funds can be used to support your friend. The buyer pays rent but at a higher than market rate and the amount of rent that is over market is applied to the principal amount that will be due on close of sale. The buyer in this scenario gets the benefit of locking in the purchase price even though the deal will not close for possibly one or two years. The buyer also gets to move into the home now.
The final option is to bite the bullet, sell a property now and pay the capital gains taxes.
Work with an attorney and tax advisor to review your options and who can help you make the most prudent decision.
Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust Management Company. This is not intended to be legal or tax advice. If you have a question call (831)646-5262 or email liza@montereytrust.com