I have a situation that doesn’t seem to have a good answer, and I need an outside opinion.
Ten years ago, my husband and I signed a contract with a limited company to buy a 3-unit apartment building (25% each; we were 50 years old and they were 70 years old). My parents spend half the cash, and my husband and I sponsor half the LLC.
We have income for financial aid, but not cash. My parents have cash, but they have a fixed income. We need each other to make it work.
On the closing day my parents said two very specific things: “This is your inheritance” and “We have a fixed income, so don’t expect that we can put cash in. for maintenance or maintenance. ”
‘For 10 years, my husband and I managed the building.’
Inheritance is not surprising and I have never thought much about it, but the cash flow I understand. Our original plan was to keep this building and hand it over to our children.
For 10 years, my husband and I managed the building and made some significant improvements. Along the way, LLC paid the mortgage and more than half of the improvement costs.
When possible, we paid 500 dollars monthly to my parents, a total of maybe 18,000 dollars. As a property manager, I think I did $ 100,000 worth of work (cleaning, finding tenants, yard maintenance, rent collection, etc.).
‘Nobody expected to get rich from this.’
My husband processed all the finances for the LLC, rewound the building, drained a unit and rebuilt it, rebuilt the deck, installed windows and made countless smaller projects; He’s very handy. No one is expecting to get rich from this, and it’s a 200 year old building that needs work. But we know it’s a good investment.
Because of COVID-19, housing prices were out of the chart. My husband and I decided (for many reasons) this would be a great time to sell the building. My parents were fully on board and we closed in mid-April. We paid $ 387,000 and sold for $ 985,000.
Now, we’re trying to figure out how to divide the money. My parents and my husband did not agree on the division. We’ve done 80% of the building’s work in addition to managing it for 10 years. There is $ 125,000 left in the mortgage when we sell it.
What kind of division do you think would be fair?
This is becoming a big deal, and I need outside opinion.
Stuck in the middle
Your parents took the risk by investing $ 193,500 in cash in this building. In return, you manage the project and take care of the maintenance. Without their contributions, there would be no LLC.
You have three options: what you are legally obligated to do under the original contract, what you propose to your parents about times and costs, and what your parents believe is fair.
Unfortunately, when people embarked on a business venture without a clear agreement on who gets what, taking into account the time and money spent, they fall into such a stalemate. .
You are operating on the basis of your parents’ comments about the inheritance. People change their minds and no one will predict the size of the profits you will make.
Your parents also have priorities, and I suspect they haven’t finished planning. They may find that sharing their profits can make their retirement more comfortable.
‘People change their minds. No one can predict the scale of the profits. ”
They may not spend the rest of their life. They should also talk to a estate planner about how this money could affect their Medicare or other long-term care plans.
In these cases, outline the profit and loss accounts for your LLC, including your own maintenance and maintenance costs and costs, and present them to your parents.
You’d better view everything in black and white on paper, first and foremost. But here is the line that stops me the most in your letter: “My parents and my husband disagree on how to separate it.”
You must first make an agreement with your husband about what is fair before reaching out to your parents to come up with a solution. Avoid triangle, as it will only lead to misunderstanding.
It is difficult to value the time you spend on this building for two reasons: You have not discussed the “salary” in advance, and without your parents’ initial investment, there will be no activity. any business.
First you have to agree with your husband about what is fair. ”
Your parents paid $ 193,500 in cash to help you buy this apartment building, or $ 175,500 up to the $ 18,000 you gave them. They will get their original cash investment back.
Pre-tax profit from your sale, excluding the remaining $ 125,000 on your mortgage, is $ 473,000.
Including your parents’ cash contributions gives you $ 297,500 to divide 50-50 between you and your husband, and your parents: $ 148,750 each before taxes.
Looks like deduct another $ 100,000 from your parents and leave them $ 48,750. Friend all agreed to change the original plan to retain the building and withdraw cash instead.
Most importantly, if you feel you should be compensated for the time you invest in the project, you should discuss that earlier. Surprise your parents with a $ 100,000 bill now is not the way to do it.
Given that your parents had the money to invest in this LLC in the first place, letting the discord between them and your husband escalate could cost you more than $ 148,750.
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