I have a situation that seems to have no good answer, and I need an outside opinion.
Ten years ago, my husband and I entered into an LLC with my parents to purchase a three-unit apartment building (25% each; we were 50 and they were 70 at the time). My parents put down half in cash, and my husband and I financed half as the LLC.
We had the income to support the financing, but not the cash. My parents had cash, but they are on a fixed income. We needed each other to make it work.
The day of the closing, my parents said two very specific things: “This is your inheritance,” and “We are on a fixed income, so don’t expect that we can be putting cash in for upkeep or maintenance.”
‘For 10 years, my husband and I have managed the building.’
The inheritance was out of the blue and I never gave it much thought, but the cash flow was understood. Our original plan was to keep this building and hand it down to our children.
For 10 years, my husband and I have managed the building and made some significant improvements. Along the way, the LLC paid the mortgage and more than half of the costs of improvements.
When we could, we made $500 monthly payments to my parents, maybe $18,000 total. As the property manager, I figure I did $100,000 worth of work (cleaning, finding tenants, yard maintenance, collecting rent, etc.).
‘No one expected to get rich from this.’
My husband handled all the finances for the LLC, rewired the building, gutted one unit and rebuilt it, rebuilt a deck, installed windows, and did countless smaller projects; he’s very handy. No one expected to get rich from this, and it was a 200-year-old building that needed some work. But we knew it was a good investment.
Because of COVID-19, the price of housing has been off the charts. My husband and I decided (for many reasons) it 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 are trying to figure out how to divide the money. My parents and my husband disagree on how to split it. We did 80% of the work on the building in addition to managing it for 10 years. There was $125,000 left on the mortgage when we sold.
What kind of a split do you think would be fair?
This is turning into a big problem, and I need an outside opinion.
Stuck in the Middle
Your parents took a risk by investing $193,500 in cash in this building. In return, you managed the project and took care of the upkeep. Without their contribution, there would be no LLC.
You have three options: what you are legally obliged to do as per your original contract, what you suggest to your parents given the time and expense, and what your parents believe is fair.
Unfortunately, when people embark on a business venture with no clear agreement on who should get what, taking into account time and money spent, they are left at such an impasse.
You are operating on the basis of comments made by your parents about inheritance. People change their minds, and no one anticipated the size of the profit you would make.
Your parents have priorities too, and I suspect they are not done with making plans. They likely realized that their share of the profit could make their retirement more comfortable.
‘People change their minds. No one anticipated the size of the profit.’
They may not spend it all during the remainder of their lifetimes. They should also talk with an estate planner about how this money could affect their Medicare or other long-term care plans.
Under these circumstances, outline the profit and loss accounts for your LLC, including the maintenance and upkeep and your own expenses, and present it to your parents.
It’s better to see everything in black and white on paper, first and foremost. But this is the line that gives me most pause in your letter: “My parents and my husband disagree on how to split it.”
You must first come to an agreement with your husband on what is fair before approaching your parents with a solution. Avoid triangulation, as it will only lead to misunderstanding.
It’s hard to put a value on the time you put into this building for two reasons: You did not discuss “wages” ahead of time, and without your parents’ initial investment, there would be no venture.
‘‘You must first come to an agreement with your husband on what is fair.’
Your parents paid $193,500 in cash to help you buy this apartment building, or $175,500 taking into account the $18,000 you gave them. They should get back their initial cash investment.
The pretax profit from your sale, assuming you use the proceeds to pay off the $125,000 remaining on the mortgage, is $473,000.
Taking your parents’ cash contribution into account leaves you with $279,500 to split 50-50 between you and your husband, and your parents: $139,750 each before tax.
It seems like sharp practice to deduct another $100,000 from your parents and leave them with $39,750. You all agreed to change the original plan to keep the building and, instead, cash out.
Most importantly, if you felt you should be compensated for the time you invested in the project, you should have discussed that earlier. Surprising your parents with a $100,000 bill now is not the way to do it.
Given that your parents had the money to put into this LLC in the first place, allowing this debacle between them and your husband to escalate could cost you a lot more than $139,750.
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