Over the years, I have had a number of clients sell a house or other real estate to a child or family members for significantly less than it is worth. Those types of transactions create a variety of nuances and risks. Here are the most common situations:

Sale. The biggest risk is if the child whom you sold the real estate to turns around and sells it a short time thereafter for its maximum value. In most instances, that would cause family disharmony.

One way to avoid this is to add a clause to the deed (or it can be in separate document) that requires that the proceeds above what the child paid for the real estate are legally required to be paid back to the parents, or to the parents’ heirs if the parents predecease. Often, this reimbursement requirement has a time limit, such as 20 years. So, if the child sells the house at some point more than 20 years after he bought it, he keeps all the sale proceeds rather than sharing them, but if he sells before that, he must share the proceeds.

In addition, using a sliding scale when it comes to sharing the proceeds can make sense. For example, if the child sold the house during the first year after he bought it, he does not receive any of the extra money above what he paid for it, but maybe each year after that, he keeps another 5% of the extra money. Let’s assume the child bought the house from his parents for $100,000, but it was really worth $300,000. For whatever reason, the child is now selling the house two years after he bought it. After his closing expenses, there is $320,000 remaining from the sale.

The first $100,000 is his to keep because that is what he paid for the house. The remaining $220,000 is split as follows: Child keeps $22,000, which is 10% of the $220,000 (because if he would have sold it during the first year after he bought it, he would have received 0%; after the first year but before two years has passed, he would have received 5%; after two years but before three years has passed, he receives 10%; and so forth), and the remaining $198,000 goes to the parents.

Death. Let’s assume a son is married but has no children. If he dies shortly after purchasing a house for a steep discount from his parents and he has no estate plan (like most young people), then that house goes to his wife under intestate law. Therefore, absent some written agreement when the house was first sold to the son, the wife could then sell the house and keep all the proceeds. Perhaps that is easier to stomach if the son and wife had children together.

Divorce. Wisconsin’s divorce law does provide that with property a child inherits or is gifted, he gets to keep it in the event of a divorce, and the couple’s remaining property is presumed to be split 50-50, though that is all subject to the judge’s discretion.

In addition, if the house a couple lived in is at least partly gifted to one spouse, that can create more uncertainty under the divorce law. However, there is legal precedence in Wisconsin that in an agreement when the house was initially sold for a steep discount to a child, the parents could have retained the right to buy the house back at what they sold it to the child for, thus protecting the gift in the event of a divorce.

If the house or other real estate would have been sold to the child for what it was worth, these issues all go away. But if a house or other real estate is sold for a significant discount and things go wrong, there is some additional documentation that can be done by a competent attorney to offer protection.

Halbach is a partner in the ag law firm Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.