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How Much Rent Can I Legally Charge my Mother-in-Law?”

Even before the outbreak of COVID-19 last March, I was interacting with an increasing number of clients considering multi-generational living arrangements. According to  an article last week in the Wall Street Journal, the incidence of these multi-generational living arrangements, defined as multiple adult generations living together in one primary residence, has actually increased during the pandemic.  According to the Journal, 15% of residential purchases made between April and June of 2020 were for multi-generational living arrangements. In 2018, a record 64 million people lived in multi-generational households, which account for 20% of the population.  As home values continue to increase, and many older Americans seek at-home end-of-life care, this trend will only continue.

In this month’s update, I suggest a few important questions to ask mom and dad (the “Senior Gen”), as well as the younger generation (“Junior Gen”), who are considering such multi-generational living arrangements.  These questions are as follows:

  • Ownership of Residence During Lifetime.   First, who owns the residence?  The family should agree, in writing, as to who owns the residence and, relatedly, how title to the property is held.  In order to avoid probate proceedings at death, we generally recommend that the title of the property be in the name of either a revocable trust (or perhaps multiple trusts), or a limited liability company in order to avoid probate at death.  The family should agree whether the family members who are not owners must pay rent.
  • Transfer of Residence in Unexpected Circumstances. Second, what happens when the son-in-law’s job transfers him to another city?  If Senior Gen and Junior Gen co-own the equity, Senior Gen and Junior Gen should create a legally-binding ownership agreement.  The agreement should specify: (1) the initial ownership percentages; (2) how subsequent appreciation or depreciation in the value of the residence should be allocated between the owners; (3) how decisions are made as to improvements or significant maintenance expenses; (4) who is responsible for mortgage payments, if any, and (5) how either party can direct a sale of the residence.  These co-ownership arrangements should address the “worst case scenarios” that attorneys seem so fond of citing (e.g., Junior Gen divorces, dies, or defaults on mortgage payments.)
  • Transfer of Residence at Death. Third, if some portion of the residence is owned by Senior Gen, how will this ownership interest pass at death?  This is of critical importance if Senior Gen has more than one beneficiary.  Will Junior Gen be entitled to a specific gift of the ownership interest “right off the top” before a division of remaining assets?  In cases where Junior Gen has significant “sweat equity” in the value of the residence, it is critical that Senior Gen has legally specified the amount or percentage of the benefit to the Junior Gen at death.
  • Ongoing Compensation to Caretaker Child. Fourth, is Junior Gen expected to provide care to Senior Gen?  Perhaps the Senior Gen enters into the living arrangement with the expectation that Junior Gen will provide at-home end-of-life care to the Senior Gen.  In these instances, a clear plan should be communicated with the entire family as to any compensation provided to the Junior Gen and/or preferential treatment under the estate plan.  The plan should include a clear plan for compensation that incorporates varying levels of care provided by Junior Gen to Senior Gen.
  • Joint Household Expense Accounts. Finally, who pays for the household expenses?  A household expense account should be established to provide for certain living expenses.  It is critical that the parties articulate which expenses are covered by this account.  The family should also create a plan to co-own the account consistent with the equity interest in the residence (e.g., in trust or LLC).

“We don’t need to get it in writing….my kids have an understanding.” Like fingernails on a chalkboard are these words in the ears of an estate planning attorney.  From both a legal and relationship standpoint, these directions should be made in writing as part of their estate plan.  Even if our clients have already given verbal direction as to their intentions, it is always better from a relationship standpoint to meet everyone’s expectations by getting it in writing.