Last time I discussed how a new law has simplified the creation of accessory dwelling units (ADUs), and how ADUs can help elders and people with disabilities live at home for as long as possible. I am so excited about the possibilities this opens for elders and disabled persons to stay at home, as well as for younger people to afford to stay here. But… (there’s always a but), there are things to think about if you are going to live with others. Today I’ll focus on the financial and estate planning issues surrounding ownership of ADUs in two common scenarios.
1. When an elder parent owns the home and the elder’s adult child moves into the ADU.
- Who will pay for necessary renovations or an addition to create the ADU? If the adult child pays, how will he or she be compensated if the elder eventually sells the house?
- If the elder eventually needs nursing home care, or upon the elder’s death, how will the home and ADU be protected so that the adult child can continue to live there?
- If the elder has other children, will they resent it if the child living in the home inherits it? Should the other children be compensated in some way?
- How to preserve a step-up in basis upon the parent’s death, and how to ensure tax benefits for the child who inherits the house?
2. When an adult child owns the home and the parent or disabled sibling moves into the ADU.
- If the new resident pays for the renovation or addition, to prevent “inheritance resentment,” should an equal amount go to their other children (or siblings) when the new resident passes away?
- If the new resident pays for the ADU’s creation, how to ensure that the resident will still be able to qualify later on for MassHealth nursing home care, if needed?
- If the homeowner gets divorced, how can the new resident’s contribution to the ADU’s construction be protected?
- How can the new resident’s right to remain in the ADU be protected if the relationship with the homeowner sours, or if the homeowner experiences financial problems?
Other factors to consider include utility and maintenance costs, the tax implications of the ADU, and the more typical co-living items, like sharing of chores, quiet hours, etc. It is essential for all parties to discuss these and other matters in advance so that everyone feels comfortable with the arrangement and, most importantly, to maintain relationships.
There are a host of estate planning strategies and tools to address all of the issues I have raised here, including life estate deeds, joint ownership, rights to occupancy, contracts, trusts, and more. I am always available to create the plan that is right for your unique situation. Working together, we can take full advantage of the opportunities available with ADUs.
Until next time, take care…