An increasing number of American adults are moving back in with their parents.
Since 2000, there has been a 30 percent increase in the number of multi-generational households. The arrangement is often prompted by an economic setback such as a divorce or a job loss.
Sometimes, a child comes home to help an ailing parent. Either way, this should prompt an estate planning review.
A will that leaves everything to all children equally, gives no legal protection- or roof over the head- of the child living in the house. A big conflict can develop between the child living at home and the heirs who want to sell the home quickly.
At a minimum, I advise my clients to give the ‘resident child’ a certain period of time to make other arrangements. This can take the form of a right of occupancy for a term of months or years, during which the child at home is responsible for all carrying expenses. Upon conclusion of the term, the child can be given a ‘right of first refusal’ to purchase the house from her siblings before it is sold to third parties.
The estate plan can be further customized to allow a child to pay off her siblings using private installment notes with a modest rate of interest. This flexible structure protects those who will likely not qualify for a conventional mortgage.
Thought must also be given to long term care needs. Absent Long Term Care insurance, Medicare and a supplement will only cover up to 100 days of rehabilitation following hospitalization. After this, a nursing home can place a lien on real property in the parents’ names.
To prevent these long-term care claims, some people transfer ownership of their homes to one or more children. I would never, in a million years do this and neither should you! The kids may be the nicest people in America, but there will still be negative consequences.
First, if my home is in my son’s name, I will lose any applicable property tax exemptions. Next, I’ve given the kids a capital gains problem. A simple gift will saddle the children with my original purchase price as their ‘tax basis.’
So, even if they keep their word to let me live in the house, they will be hammered with taxes when they sell the property at my death. Last, a simple transfer will subject the property to claims by an in-law if my child gets divorced.
A properly drafted trust, on the other hand, will commence the running of the so-called 5 year lookback period for Medicaid, it will preserve any applicable property tax exemptions during my life. I can still sell the property if I wish (and get my $250,000 capital gains exclusion), the children will pay no capital gains taxes upon future sale, and I can protect the property from my children’s divorces or other possible liabilities.
Note, that I can only get these great benefits if the trust is not purely irrevocable. When creating a trust, it is critically important to retain as much power as possible. For example, I want to be able to remove and replace the trustee at any time.
I also want to be able to remove and replace the beneficiaries. Without this power, I would be unable to do anything if a child predeceases me.
The power to change beneficiaries also allows me to temporarily remove a child who is about to go through a contentious divorce. Once it is over, I can replace her as a beneficiary.
Another great benefit of the house being owned by the trust is that the family will avoid a lengthy probate process. It is now very easy to avoid probate on our liquid assets by naming beneficiaries. The trust is the best way to ensure that the family isn’t forced through probate because of the house.
The bottom line is that a major life change, such as children moving back home, should cause us to revisit our old estate planning. A fresh and creative approach can ensure maximum security and resultant happiness for the whole family.
Ann Margaret Carrozza is a practicing Asset Protection attorney who also served as a state assemblywoman for 14 years. She is a legal contributor to TV shows and is the author of Love & Money, Protecting Yourself from Angry Exes, Wacky Relatives, Con Artists and Inner Demons. She can be reached at 718.224.4746. Visit www.myelderlawattorney.com for more information.