Home Ownership When Parents and Adult Children Live Together

Takeaways

• Multi-generational households present legal and financial challenges around home ownership.

• Different home ownership options are available to multi-generational families, such as joint ownership, tenants in common, and life estates.

• Each option has its own advantages and disadvantages, and it is important to consult with an estate planning professional to determine the best option for a specific situation.

Increasingly, several generations of American families are living together. According to U.S. Census data, about 20 percent of the population live in households containing two adult generations. These multi-generational living arrangements present legal and financial challenges around home ownership.

Questions Your Multi-Generational Family Should Answer

Multi-generational households may include “boomerang” children. This could be adults who return home after college or other forays out into the world or middle-aged children who’ve lost their jobs. Seniors who have lost their spouse or who no longer can or want to live on their own also may opt to live with their grown children.

In many cases, when a parent moves in with the family of one of their adult children, everything works out well for all concerned. However, it's important that everyone, including siblings living elsewhere, carefully consider answers to a host of rather difficult questions. These may include:

• If the aging parent owns the house, what happens when they pass away? Will their grown child’s family have to move out of the home? If the aging parent leaves them the house, will the other siblings find that fair?
   
• Perhaps the aging parent has instead decided to leave their children their savings and investments. However, what happens if the family must spend that money on care for their aging parent?
   
• Imagine a senior parent pays to build an in-law addition on their daughter’s house.
  
  What guarantees should the aging parent have about being able to live there? What if the aging parent then must move out because they need care the family cannot provide? Would their daughter simply get the advantage of the property's increase in value? What if the aging parent needs the money they put into an addition to live on?

• What are the Medicaid issues if the elder need nursing home care within five years?
   
• Who will care for the elder if they acquire a disability? Will it be a family member, and will the elder pay them for their services?
   
• Think, too, about paying for living and housing expenses. Figure out what everyone’s expectations are before a move takes place.
   
• What happens if the aging parent is living with their daughter and son-in-law who end up divorced? What if one of the adult children gets a great job offer in another city?
   
• If grandchildren are still living at home, is the aging parent expected to help with child care?
   
• How do the answers to the questions above change if everyone is pooling their resources to purchase a new home for the whole family?

Many of these questions are challenging to answer in the abstract. Have an open discussion about them with your loved ones at the start. Consider taking notes on the answers and reviewing them together as your circumstances shift over time. This can help avoid any arguments down the road.

Home Ownership Options

The answers you’ve come up with may lead you to consider different forms of home ownership. Depending on your family’s goals, one of the following options could prove a potentially worthwhile solution:

Joint Ownership

Let’s say the elder parent, their daughter, and their son-in law own the house as joint tenants with right of survivorship. In this case, when the elder passes away, the house goes to the other owners without going through probate.

This strategy could have a specific advantage if the elder ever needs Medicaid to pay for long-term care. The family may be able to avoid estate recovery (the state’s claim for reimbursement at their parent's death).

Some states have expanded the definition of estate recovery to include property in which the Medicaid recipient had an interest but which passes outside probate. In those states, property in joint ownership may in fact be subject to estate recovery. If the house is sold while the owners are alive, the proceeds (absent another agreement) will be divided equally among the co-owners.

Tenants in Common

In another scenario, perhaps a mother, daughter, and son-in law own the house as tenants in common. After the mother has died, her share would pass on to whomever she has named in her will. This may be fairer to other family members, but does not avoid probate.

As with joint ownership, if the family sells the house while all the owners are alive, the co-owners would (absent another agreement) divide the proceeds equally.

Life Estate

A life estate is a form of joint ownership where the elder family member is the “life tenant.” This means they have the right to live in the house during their lifetime. At their death, it passes automatically to the “remaindermen.” This can be anyone the mother had named: a daughter, son-in-law, or all her children equally.

Like joint ownership, it avoids probate and thus may also avoid Medicaid estate recovery. If the family sells the property, the elder parent and whomever is on the deed as remainder men divide up the proceeds, with the shares being determined based on the elder's age at the time. The older they are, the smaller their share and the larger the share of the remaindermen.

Trust

Putting the house in trust is the most flexible approach because a trust can say whatever the person creating it wants.

It can guarantee the senior parent the right to live in the house and compensate their grown child for the care they provide. It can also take into account changes in circumstances, such as a daughter passing away before a mother. At the same time, it avoids probate and Medicaid estate recovery.

Consult an Estate Planning Professional

Each of the options outlined above also will have different tax results. When you sell the home, you may see different impacts on capital gains, for example. You also could see Medicaid benefits change for your parent if they need help paying for care.

Be sure to consult with an attorney to determine what makes the most sense in your unique situation. Find a qualified estate planning attorney near you.

For additional reading, check out the following articles:

• A Seniors Guide to Estate Planning
• Selling Your Life Insurance Policy to Help Cover Expenses
• Avoiding Property Tax Foreclosures for Older Adults
• Report: Planning for Amercia's Aging Population