Q: My mother-in-law has recently moved in with us from Chicago, Ill.

We are currently renting out her house, and would like to purchase the house from her. The home in Chicago is paid for.

How should we go about purchasing the property. Should we set up a trust with my sister-in-law, her daughter? We were told this might be good for tax purposes, but a mortgage company we have talked with will not loan money on a trust. The deed must be transferred into my wife’s and her sister’s names.

If the deed is transferred into her two daughters’ names, will that be considered a gift? Would she be liable for gift tax?

A: I’m a little unclear as to what your long-term intentions are with the house. It’s clear that you want to buy the house, but do you want to live there as a primary residence? Does your wife’s sister want to live there? Would the house simply be an investment? How does your sister-in-law fit into the picture?

If you and your wife and her sister purchase the property from your mother-in-law as an investment property, your mother-in-law could hold the mortgage and you could pay her monthly, as you would a bank.

There are obvious benefits to this: Your mother-in-law would keep the first $250,000 in profits tax-free on the home. You could rent out the property and share the income and expenses with your sister-in-law. Your mother-in-law would have a terrific cash-flow from the property to help make her financial life more secure.

When she dies, her estate can demand repayment of the loan in full, or it can forgive the loan (depending on how much cash she has in her estate). If you and your wife are picking up the financial burden of caring for your mother-in-law, and she decides to “repay” you out of her estate, this is an issue that should be fully discussed with all other heirs, including your sister-in-law, to avoid bad feelings after her death.

I don’t understand what a trust would do for you in this situation. But I do think you should talk to a good real estate attorney in Chicago (attorneys are typically used to close house deals in the Chicago metro area) about what you’re trying to do and what financial goals you, your mother-in-law, and your sister-in-law, are trying to achieve. You may even need to talk to an estate planning attorney to determine what tools you might be able to use to help you achieve your goals.

Only that way can you get the kind of advice you need to move forward.

Oct. 3, 2005.