Pay Dirt is Slate’s money advice column. Have a question? Send it to Lillian, Athena, and Elizabeth here. (It’s anonymous!)
Dear Pay Dirt,
My husband and I recently bought our first joint home and his granddad kindly gave him $15,000 toward the downpayment. The remainder of the downpayment ($85,000) was funded by the sale of my condo which I saved for, purchased, and renovated extensively throughout my 20s before I even met my husband. The rest of the house purchase was covered by a mortgage. My problem is twofold.
My husband’s granddad has been bragging about “buying [my husband] a house” to friends and relatives and I find this irritating because it’s inaccurate—he actually bought around 4 percent of the house—and it feels like my contribution is unacknowledged. Should I let this go and allow an elderly man his moments of pride?
The second issue is that a bunch of my husband’s relatives believe this boast and are complaining that my husband manipulated his granddad unfairly and/or my husband shouldn’t receive any further inheritance due to this. Is there a way to politely correct these misunderstandings? A couple of times I’ve replied, “We’re grateful [granddad] contributed to the downpayment” when my husband’s relatives bring it up (which happens often!) without giving specific figures. My husband never says anything and doesn’t mind if I do or don’t. Please tell me if I need to let this go, these comments annoy me more than they probably should!
—I Worked Hard for the Money
Dear I Worked Hard,
Instead of contradicting grandad when he inevitably brings up the gift, feel free to “yes, and” it. You can acknowledge his contribution and your work as well. Next time someone brings it up, try tacking on a more concrete addition to your script about how your hard work went into it. Instead of only “we’re grateful [grandad] contributed to the down payment,” add “and we’re thankful that I was able to get a good price on my old condo after all my renovations.”
When it comes to worrying about the inheritance, family members love to talk, but unless they seem to be influencing grandad, it’s just not worth debating. Only he decides how his inheritance is split, and he already knows the accurate details of his gift. It’s even possible he does consider the $15,000 of help with a down payment to be in lieu of any inheritance (unless he has stated otherwise). Be grateful for the gift, and don’t stress too much about an estate out of your control.
Dear Pay Dirt,
My husband, teenager, and I live in Seattle in a cramped two-bedroom, one-bath house that needs substantial repairs and is on a large lot. My husband is a professional carpenter with the skills to remodel/expand the house and add a DADU.
However, my husband and I have serious mental health issues: anxiety, depression, and severe ADHD which make budgeting and managing daily life tasks quite difficult. He has always earned below market rate and for several years has worked only about 20 hours per week. I earn the low end of a middle-class income and provide our healthcare benefits, paid sick time, and vacation time. I was my mom’s primary caregiver for the last 10 years (she has since passed away). We have two mortgages with high-interest rates, poor to so-so credit, no college fund, and very little retirement savings. I’m frustrated, yet hopeful that it’s not too late to build a more stable life.
My husband’s parents are quite wealthy. I’d like to ask them to buy our house or finance a remodel and DADU addition, and then either sell it for a substantial profit or buy it back from them and move back in. We could then use the rental income to repay them, help our daughter with college costs, and pay off the mortgage. Despite the issues above, my husband is capable of working full-time to complete a remodel, and I think taking steps to improve our situation could build confidence and motivation. We would need to move out during the remodel, but if this plan includes paying my husband a monthly salary at the going rate for carpenters, along with my income, we can afford to do that.
Is there a way we can do this that would benefit everyone? For instance, maybe my in-laws would recoup the purchase price and costs to remodel, and we split the remaining profit at whatever rate makes sense (Maybe 50/50? Or maybe a higher rate going to my in-laws for fronting the money, taking the risk, and helping us to get back to financial stability, with a lower percentage of the profit going to us?). I’ve also considered selling our house, buying a bigger but more affordable condo, and asking my in-laws if they would help finance flipping a house or two and sharing the profits. I’m so tired of this situation where my husband has the skills to remodel or build high-quality and beautiful houses, but we don’t have the financial savvy to leverage those skills to earn a good living.
—The Carpenter’s Family Needs a New Home
Dear Carpenter’s Family,
You have three puzzle pieces you’re trying to slot together to improve your situation: wealthy in-laws, a skilled husband, and a small house on an oversized lot. But the ways you’re trying to combine aren’t all the way thought through. In all of your scenarios, what you are proposing is forming a business with your in-laws. Mixing business and family can get very messy and even destroy relationships.
To propose any of these scenarios to your in-laws, you need to prepare a complete business plan for them, like any other investor. The business plan should include estimated construction costs and contingencies, what comparable homes in the area rent for, and an operations plan (How much will permits cost and who will apply? Who would manage the DADU? What’s your plan for vacancy?). Remember to include the cost of labor beyond your husband: plumbers, tile layers, electricians, and engineering. While your husband has the carpentry skills to do the remodeling, preparing a plan and budget would demonstrate the additional skills needed to make this a successful business.
If you are going to structure this as a business investment, remember that your husband would be a co-owner, not an employee of his parents. What makes house flipping a profitable business model is that the work done (sweat equity) by the owners is not paid at a competitive hourly rate—the owners get paid out when the home sells or rents. By proposing that your husband’s parents pay him a competitive hourly rate, you are suggesting that his parents become his boss—paying him a monthly salary that is higher than what he earns working other jobs, to work on his own house. If he’s able to make the market rate as a carpenter and he’s capable of working full-time hours, working a traditional job involves far less risk than starting a business with his parents. Working a conventional job doesn’t have as much of an ADHD-unfriendly administrative burden as running a real estate business, either.
Because you have two mortgages on your home, before even considering a remodel or DADU, it’s worth checking the terms of your loan. Your lenders may have conditions for a remodeling project because it can open the property up to other liens (like from suppliers), depending on your state.
If you think your in-laws are open to helping, there are ways to ask for their assistance to get back on your financial feet that don’t involve going into business with them. You can purchase a larger (but more inexpensive condo) and ask them to co-sign the loan or give you a low-interest loan for the down payment. You could ask them to contribute to a 529 plan for your daughter’s education. Consider options that don’t put your in-laws in the position of becoming their son’s boss and investor.
Dear Pay Dirt,
My wife and I are in our mid-50s, married for 30, and I am hoping to retire in four to six years. My wife made some bad financial decisions in the past so we keep most of our finances separate. We got a good price on our old house and took that opportunity to buy a fantastic house up in the mountains.
My wife at first agreed to the move—literally picking the house we bought—but has since decided it is too cold. She wants to buy a condo somewhere warmer where she can live during the winter months. I reluctantly agreed to cover most of the cost by cashing in an investment and taking out an equity loan on the house (I haven’t withdrawn the money yet). She was supposed to get the rest through a mortgage based on her personal finances. She was initially told she qualified, but they now have re-evaluated and won’t give her the loan. She has asked me to co-sign the mortgage.
I was opposed to the idea from the beginning and am now being asked to commit even more. I can easily cover our expenses today, but with the uncertainty of the economy, I don’t think taking on more debt and responsibility is a good idea. I also worry about what it will do to my credit rating and to my desire to retire in the near future. What are the dangers to me if I co-sign? Is there a better alternative?
Taking out an equity loan on the home, cashing out investments, and co-signing a mortgage on a second home is getting you further away from being prepared for retirement. I wouldn’t recommend co-signing on your wife’s loan if the bank doesn’t want to lend to her, especially since you have worked hard to keep your finances separate for the past 30 years. You risk hurting your credit if she defaults on the loan, and you’re turning relatively liquid assets (investments) into something much harder to cash out (a condo).
Rather than buying a second condo, your wife can rent either an apartment or a vacation home in the second city. By renting, it will be easier to make changes if your income goes down, or if she changes her mind again about where she wants to live.
Dear Pay Dirt,
My divorce agreement requires my ex to continue to keep an insurance policy on his life, with me as the sole beneficiary. The benefit amount is $100,000. What will the tax consequences be if/when the policy pays out? Are there steps I can take—now or upon payment—to minimize the taxes? (Grasping at straws here—perhaps involving some kind of trust?)
Also, what would be the best way for me to use the payment? I am retired and owe nothing on my auto or house. I have $10,000 stashed away for emergencies. My income consists only of Social Security benefits (about $2,400 a month) that cover all of the expenses of my happily pared-down life. My biggest concern is possible large medical bills in the future. I’ve had a lengthy hospitalization in the past, at a time when I had no health insurance, and was thankfully able to have that huge debt forgiven by the hospital due to my limited income. I now have Medicare Part B. Is there a way to shield the insurance funds from medical creditors?
Life insurance proceeds are rarely taxable to the beneficiary, so you’re likely in the clear there. There is an easy IRS tool for discerning whether your life insurance proceeds are taxable.
If you expect to need long-term care, you have a couple of options to shield your assets from medical creditors and possibly from Medicaid. Investing in a qualified annuity that is Medicaid-compliant would allow you to access a regular income from the investment while not having the value of the investment counted as part of your assets.
If you’re more concerned about passing the $100,000 to your heirs rather than using it for additional income, a Medicaid Asset Protection Trust, or another irrevocable trust, is an option to explore. An irrevocable trust would not allow access to the principal in your lifetime, only the income. Still, it would shield your assets from counting against qualifying for Medicaid or counted by medical creditors.
It’s worth considering whether purchasing long-term care insurance could also make financial sense for your situation. With a history of a lengthy hospitalization, long-term care insurance might be a good deal for you, especially if you get a life insurance payout.
More Advice From Slate
I’m a single mother, sole parent to a 6-year-old son. From the time he was 3 months old to 9 months old, I worked 12-hour shifts in a hospital. Since he was just over 1 year old, I’ve worked a regular 9–5 job and I’ve taken him to daycare or school in the morning and picked him up every evening, and have been home to put him to bed. Next month I will be starting a new job, working 12-hour night shifts in a hospital two hours away from our home. (I’ll commute and will sometimes stay up there without him.) He seems prepared for me not being with him overnight sometimes and not seeing me for a couple days, but he recently asked for a phone of his own so we could exchange messages. My first thought was this was ludicrous—he’s 6!