During Covid, many of us are balancing working remotely while caring for our children. This autumn, most of our children are returning to part-time or all remote school. We are using our residences as a home, office and school. We are racing from virtual meetings and work calls to guiding our children with remote learning and homework. We are doing all of this while shopping, cooking and cleaning up after preparing three meals a day. These extra uses of our homes create more housework, maintenance, and general wear and tear.
Exhaustion is setting in, and it is not surprising that many of our clients are considering moving in with their parents or children and want to talk through the legal issues of living with multiple generations in one home. They wish to share the burdens and the benefits of raising and teaching the children together, dividing the chores, maintaining the home and pooling their finances together during this time of uncertainty.
This means the ownership of the home that everyone is living in needs to be discussed. If you are considering living in a multigenerational home, there are some initial questions that you need to discuss with your family. How will the ownership be structured? Who is contributing to the purchase price? Is it a gift, an advance on inheritance or a loan? Or will everybody hold an ownership interest equal to their capital contribution? How do you equalize your estate to the remainder of your family?
What happens if a couple gets divorced? Who has the right to reside in the home and how will the ownership be divided?
What happens if a parent must later reside in a nursing home for care? Do they have sufficient assets in their name to pay for nursing care, or will Medicaid look to their ownership interest in the home for payment?
If one of the homeowners dies, who receives his or her interest in the home?
The answers to these questions will determine how best to legally structure the ownership of the family house together.
One of the often-overlooked issues is the payment of the estate taxes at the death of an owner. Take, as an example, a client who has a home worth $2 million and an investment account worth $2 million. Her daughter, son-in-law and granddaughter have moved in with her. The client has a last will and testament stating that her home will be distributed to her daughter, that the remainder of her estate will be distributed to her son, and that the estate taxes will be paid from the residue.
The client thinks she has equalized her estate between her children. Since she has a standard will, the taxes are to be paid by the residue, meaning the state estate tax of $280,400 on a $4 million estate must be paid by the remainder of the estate.
Because of this tax clause, the specific bequest of the home will pass estate-tax-free to the client’s daughter, and the remaining funds in the investment account intended for the son will be required to pay the estate taxes to the state’s department of revenue.
To add insult to injury, if the investment assets are retirement accounts, the assets will not receive a step-up in basis at the client’s death, and as the funds are withdrawn from the account to pay the estate taxes, the son will be required to pay ordinary income taxes too! Yet the daughter, meanwhile, would receive a step-up in basis equal to the fair market value of the home on the date of the client’s death, and the daughter would incur no taxable gain if she sold it for the same value.
If the client wishes to maintain control and ownership of her home, we set up a realty trust to own the home, with her as the sole trustee and her revocable trust as the underlying owner. In the revocable trust, upon her death, we first divide the estate into equal shares, then allocate the home to the daughter’s share. If the value of the home exceeds the one-half value of the total estate, then the daughter has the right to purchase the excess from the trust for the fair market value. If the value were less than the one-half value of the total estate, the trustee would transfer a portion of the investment assets to the daughter to make up the shortfall. This ensures that the daughter and son are able to equally enjoy inheriting the appreciation of the house over time.
In addition, we include an allocation tax clause so that the taxes would be borne equally by the daughter and son.
We have had other clients share home ownership with their children using a family limited partnership to track their capital contributions toward the purchase of the property and to provide an agreement for the use and maintenance of the property. If the property needs renovations or improvements, a family member may provide a loan to the partnership secured by a mortgage on the property for the outlaid costs. The long-term applicable federal rate for a family loan is 1.17% in November 2020. The partnership agreement states that if a family member leaves (by death, divorce or just plain choice), an appraisal is obtained to determine the fair market value of the partner’s interest. The remaining partners may buy out the leaving partner, or they may elect to sell the home to a third-party purchaser. When the sale is complete, any secured loans are paid in full, expenses and closing costs are paid, capital contributions are returned to all partners, and then the net sale proceeds are divided in accordance with partnership interests.
Each family situation is unique. As are the properties that they choose to live in together.
Rebecca MacGregor is an estate planning attorney with nearly 20 years of experience at the Massachusetts law firm of Bowditch & Dewey.