The way families are living in the day to day has changed dramatically over the past several months due to the pandemic.
Most families have one or more parents working remotely, and many have one or more children in school remotely, part-time if not all of the time. The situation has also made it challenging to spend time with parents and grandparents who life in different households.
As a result, some older adults are exploring or have already taken action to move in with their adult children and their families, or vice versa.
Before you take the leap, be aware of the various issues involved in moving in with family, especially if you’re going to share home ownership across multiple generations.
First, there are several considerations when thinking through the home ownership arrangement, either for a new home or to share the burden of an existing one.
If older parents are making a contribution to buying a home, determine how that will be treated.
The contribution might be considered as any of the following: 1) a gift, 2) a loan, 3) an advance on the adult children’s inheritance, or 4) a contribution to the home purchase to share an ownership interest in the property.
Make sure you have a plan in place in case any couple involved — either the older parents or their adult children — gets divorced. Define who will be able to live in the home and how any shared ownership interest will be divided.
You will also need to make decisions based on whether the older parents have enough assets without the home itself to afford nursing home care. Otherwise, Medicaid could attempt to garnish their interest in the home to pay for that care.
Estate planning considerations
There are many important estate planning elements related to a shared ownership arrangement.
First, think about who will receive the ownership interest when one of the owners dies and define it clearly in writing. You’ll also need to define how estate taxes will be paid.
In figuring out ownership interests, you’ll also need to think through how you want your assets divided at your death.
Parents often seek to distribute their estate equally to their children. But be aware that what looks like equal division of assets isn’t always what it might seem when it comes to shared homes.
For example, consider an older adult who owns a home worth $1.5 million and stock and mutual fund investments worth $1.5 million. Let’s assume say his son, daughter-in-law and two grandchildren move in with him, and he also has a daughter. A typical scenario might be for the older adult’s will to say that the home goes to the son, the remainder of the estate goes to the daughter and the estate taxes will be paid from the residue, which are any assets not left to anyone specifically. That’s how a standard will would be written.
However, the result here would not be the equal division of assets the father intended. That’s because the home would pass to the son free of estate tax, he would receive a step-up in basis that brings the value of the home to the fair market value on the date of the father’s death, and there would be no taxable gain for selling the home at that value.
The daughter would not fare so well, as the estate tax would have to be paid out of the accounts she inherited. Further tax implications would reduce her share if the assets were contained in retirement accounts.
To ensure that assets are divided in the way you intend, consult with an estate planning lawyer to set up a trust arrangement that makes sense for your family. The assets within the trust can be set up to ensure an equal division of assets.
Based on the example above, a revocable trust could be set up to ensure equal division of assets and equal division of the liability to pay estate taxes.
Family limited partnership option
Another option to consider is shared ownership using a family limited partnership.
The family limited partnership agreement would lay out how the property will be used and maintained, and how any home renovations will be handled. A family member could make a capital contribution or loan to the partnership to pay for any improvements and all loans and contributions would be tracked.
The agreement would explain that, when a family member exits the arrangement, the home will be appraised to determine the fair market value of the departing partner’s interest. At that point, the other family members sharing ownership of the home can buy out the partner who is leaving or decide to sell the home entirely.
If the home is sold, any secured loans would be paid, along with closing costs and expenses. After any capital contributions are repaid to the partners, the net proceeds of the home sale would be divided based on each family member’s interest in the partnership.