How Does Estate Planning Work for Multigenerational Living Arrangements?

Q. To save money, my parents, my husband and I, and our daughter and her family all live under one roof in a much bigger home than any of us could afford alone in Northern Virginia. With this living arrangement, I can care for my mother, who is in the early stages of dementia, and help with my grandchildren when they get home from school. It’s working out well so far. I’m wondering, since we all own the house and most of its contents together, how does estate planning work in this situation? Thanks for your help!

A. Between 1971 and today, the number of Americans living in multigenerational households has quadrupled, growing from about 14 million to more than 60 million. That translates to 18 percent of the US population!

Most people who live in multigenerational households give finances and caregiving duties as the reasons for doing so. For the younger generation, sharp increases in house prices, people marrying later, and student debt on the rise are reasons younger generations are more likely to continue living with their families. Middle-aged to older folks, people in the sandwich generation, are taking care of their children and their parents simultaneously. For these people, multigenerational living can be the easiest option both practically and to avoid the cost of assisted living or other long-term care options.

Estate Planning Considerations for Multigenerational Families under One Roof

For all the potential cost savings, multigenerational households can still face financial stress and must take certain things into consideration when estate planning. This is because when multiple generations live on the same property, issues over ownership, who inherits what, and who provides what can quickly get complicated.

Determine Goals, Priorities, and Constraints

If you live in a multi-generational household, it is a smart idea to have an open and honest discussion with all adult members of your family — not just the ones you live with. Initially, a list of goals should be developed. Frequently-cited goals for multigenerational families (and everyone else) include:

1. Minimizing taxes;
2. Providing adequate retirement security (avoiding unnecessary dependency on others);
3. Treating heirs fairly;
4. Providing for beneficiaries with special needs;
5. Continuation of a family business;
6. Continuing family ownership of a home, farm, or vacation property; and
7. Maintaining maximum flexibility to meet changing needs and situations.

Once you’ve decided on your goals, determine family members, charitable organizations or others that you wish to include in your estate planning documents.

Questions You Should Consider for Estate Planning Purposes

Multigenerational living situations can create questions, such as if a grandparent pays for an in-law apartment on their child’s property, who owns the property; or, if an adult child living with senior parents contributes to updates on the property, pays for upkeep and maintenance, or provides caregiving services to senior parents, should this result in an unequal inheritance? We’ll delve deeper into some of these questions. Keep in mind that all of them can be addressed in estate planning documents.

Who Should Own the Property?

If you are buying a home for a multigenerational family, you need to determine well before closing how the home will be titled, and you should seek the advice of an experienced Elder Law attorney in making this decision; you should never rely upon the closing attorney or the title company for advice in this regard as they are not likely to take into consideration any of the incredibly important estate planning or elder law issues surrounding how property is titled.

If you are already living in the home and you did not consult with an experienced Elder Law attorney prior to purchase, the first question your estate planning/Elder Law attorney is going to ask is how the property is titled. The answer I receive more often than not is “joint ownership,” but in reality there is no such thing legally as just “joint ownership,” because joint ownership can refer to many different types of title:

• Joint with right of survivorship, which means every owner has an equal share of the property and if one owner dies, the other owners inherit the share of the deceased owner, the last living survivor owning the entire property. This right of survivorship can be overcome if one joint owner deeds his or her share into a trust or into an LLC or other entity, which automatically severs the right of survivorship.
• Tenancy by the entirety, which is a type of joint ownership with right of survivorship that is only available between spouses.
• Tenants in common, which is a type of joint ownership where each owner may own a different fractional share, and on the death of any owner, that owner’s share gets distributed to any person chosen by the decedent via their last will or living trust, or via the laws of intestacy if the owner dies without a will or a trust.
• Joint ownership where one or more persons own a life estate (giving them the right to live in the property for their lifetimes) and one or more persons own the remainder interest, meaning those persons will inherit the property upon the death of the life estate owners.
• In trust, in which case your estate planning attorney will need a copy of the trust to review, as there are a dozen or more types of trusts that can own real estate.
• In an LLC, in which case your estate planning attorney will need a copy of the LLC Operating Agreement to review, as the operating agreement controls all aspects of the LLC and what happens when one member dies.

Practical Considerations

• Which family members should be permitted to live in the home?
• How will utilities, maintenance, repairs, and capital improvements be paid for now and in the future?
• How does the actual title (see above) affect how other family members receive or don’t receive a share of an inheritance?

Who Provides the Care, and Who Inherits the Property?

Oftentimes, a sibling or other family member who does not help provide care might be upset if they receive less of an inheritance. How each family chooses to deal with this depends upon family dynamics and what is right for each particular family. Here are some things to consider:

• If one child provides care for an aging parent, or a grandparent cares for grandchildren regularly, should this be monetized and factored into the estate plan somehow?
• Will those individuals providing extraordinary care to other family members be compensated somehow?
• Should the value of the real estate be used for this purpose?

If it will be difficult to treat children equally due to the assets being tied up in real estate, life insurance can be an option to create liquidity and to equalize inheritances between siblings. Caregiver agreements can also be put in place during lifetime to compensate caregivers for the care they are providing to family members. Sometimes updating beneficiary designations on retirement accounts might make sense, but always be aware of the dangers of beneficiary designations.

A Trust Can Detail All Aspects of Use for the Property

Many families choose to use a trust to detail all aspects of use and ownership concerning property. Here’s why:

• A trust can include language regarding:
  • right of first refusal language governing who has priority to purchase the property upon a parent’s death;
  • equalization language between beneficiaries to take into account gifts to certain family members during life; and
  • tax provisions to ensure beneficiaries pay applicable taxes equally or proportionally.
• The trust can manage funds to:
  • cover various expenses related to the real estate;
  • detail the management of the real estate; and
  • include the use of the real estate to the needs of the specific situation of the family.
• The trust can deal with what happens in the event of the incapacity or death of a family member, and what will happen with the property for future generations.

Using an LLC Could Be Beneficial for Multigenerational Living Arrangements

Using an LLC or partnership often allows for easier ownership of a property among various family members and provides for management of shared use. LLCs can also help with asset protection and privacy.

An LLC operating agreement determines which members will be in charge of the daily operation of the property, payment of expenses, and how the ownership interests are divided. Loans can be leveraged to make improvements on the property and the partnership agreement can address many different scenarios for a family should an issue arise.

There are administrative costs to setting up an LLC to be mindful of — a registration fee to your state, the legal fees associated with creating an LLC operating agreement, and potentially annual tax returns. Please read more about the advantages and disadvantages of LLCs in my article on the subject.

Consider Estate and Gift Taxes

Multigenerational estate planning is often designed for high net worth families who wish to minimize the payment of federal and state estate taxes, to ensure the majority of their wealth is available to supplement the expenses of their children, grandchildren, and even great-grandchildren. But by far the vast majority of people owning multigenerational property are not in a high-net-worth category, as high-net-worth individuals make up less than 1 percent of the US population. For the 99 percent of the population, more important are concerns about gifting and Medicaid eligibility. Please read “Medicaid: The Perils of Gifting FAQ” on our website for more information on this topic.

You Can Still Have Your Own Plan

Planning with your extended family doesn’t necessarily mean you won’t be able to create a private plan for yourself and your spouse. In fact, it is imperative to create individual estate plans for each nuclear family while still respecting the decisions that the extended family make together.

Every Family’s Situation Is Different

If you are living in a multigenerational household, it’s important to discuss all of the facts and all of the wishes of all family members with experienced Elder Law and estate planning attorneys, such as those at the Farr Law Firm, to ensure that your estate planning documents match your wishes and address the issues raised in this article.

With advance planning, each person, regardless of their family situation, can retain the income and assets it has taken a lifetime to accumulate and the peace of mind that their child(ren)’s needs will be adequately and properly addressed. If you or members of your family have not done Incapacity Planning or Estate Planning, or if a loved one is beginning to need more care than you can handle, please contact us as soon as possible to make an appointment:

Northern Virginia Estate Planning: 703-691-1888
Fredericksburg, VA Estate Planning: 540-479-1435
Rockville, MD Estate Planning: 301-519-8041
Annapolis, MD Estate Planning: 410-216-0703
Washington, DC Estate Planning: 202-587-2797