My cousin has an influence of lawyer, ought to she promote the home now or anticipate her mom to die?
Q: My cousin has a power of attorney for her mother (my aunt) and I am the executor on her will. My aunt is widowed, diagnosed with dementia and moved to long-term care. In her will, the proceeds from the sale of her home are shared between my cousin and her three stepsisters. My cousin is considering selling the house now so it doesn’t have to be serviced. What will be the tax implications if she just sells the house and donates the proceeds to the four of them instead of waiting for their mother to die?
ON: This is actually a legal issue, not a tax issue. Your cousin should seek immediate advice from a knowledgeable estate planning attorney to coordinate both the sale of the home and the investment or distribution of the proceeds after the sale. In the meantime, I’ll outline the issues to prepare your cousin for discussion with the lawyer.
Most importantly, your cousin must act in her mother’s best interests under the authority, not in the interests of herself or her stepsisters. In fact, your cousin could be legally held responsible for anything that is not in her mother’s best interests.
If your aunt is never going to move home again, the house problem should be resolved. Your cousin has authority to sell the house, keep it empty and have it properly maintained, or even rent it out.
To keep the house empty it needs to stay safe and not be at risk from fire, flood, robbery, etc. Your cousin must use her mother’s income or investments to pay for ongoing household expenses such as heating, hydropower and property taxes, snow removal, lawn maintenance, and mortgage payments (if any). Your aunt’s property insurance company must be notified and appropriate insurance taken out for an unoccupied house. The insurance company also requires that the property be checked regularly. This option is tedious, and I suspect that all duties would fall on your cousin.
The house could be rented with income covering part or all of the household expenses. If there is a profit on the rental income, the extra cash flow will be invested for your aunt. If the property is showing negative cash flow then the expenses will need to be supplemented from your aunt’s income or investments. Again, your aunt’s insurance company needs to be notified that the house is renting out and the appropriate insurance needs to be arranged. This option is also time consuming and would still require your cousin’s supervision even if a property manager were hired to find suitable tenants and oversee the property.
The third option is to sell the house. However, the proceeds will be invested in favor of your aunt and not distributed to your cousin or stepsisters. Remember that the power of attorney must act in the best interests of the person for whom it is acting.
As your aunt’s executor, you are responsible for paying off her fortune after she dies and distributing her fortune to the beneficiaries, your cousin and her three stepsisters.
(There are a handful of circumstances where your cousin may distribute some of your aunt’s property before she dies, but doing so requires legal guidance.)
There are no income tax ramifications if you keep the house empty or if you sell the house before or after your aunt’s death as the sale of a primary residence is not taxable. However, if the home is rented out, rental income and expenses must be reported on your aunt’s annual tax return and on her final tax return.
It sounds like selling the home might be in your aunt’s best interests – coordinated by her daughter, who is acting under the authority – with the help of a skilled estate planning attorney.