For many middle-class estates, the family home is the most valuable asset.
If the home is held in a trust, its terms generally allow the successor trustee to sell it after the owner dies, pay any remaining expenses, and distribute the proceeds among the beneficiaries.
In some cases, parents may want the home they are leaving to be more than an immediate cash windfall that can evaporate quickly. They might specify in their trust that the home stays in the family as a residence for one or more of the children or to provide rental income to the beneficiaries.
While the parent’s intentions may come from love and concern, passing down a home with strings attached can create legal and financial complications. What was meant to be a meaningful gift could become a burden and source of arguments and litigation for the next generation.
For example, Stella was a widow with three children. Her son Jason suffered a traumatic brain injury in his 20s and had lived with her ever since. She worried that after her death, her daughter, the successor trustee, might sell the house and leave Jason without a home. Stella wanted to make sure he would have a place to live for the rest of his life. Her trust gave Jason the right to remain in the family home, with the house to be sold after his death.
This sounds like a good plan, but what happens if Jason wants to move? He might find the upkeep too difficult, he might eventually need to enter an assisted living facility, or he might just want to live elsewhere. Stella needed a way for the trustee to act if the home no longer met Jason’s needs.
When siblings live in the home
Other parents will instead give a child transition time in the home before moving, perhaps with an option to pay rent, take over the mortgage, or buy the home if they want to stay.
Emma and Brad’s parents’ trust gave Brad two years to continue living in the family home after they passed away, along with his responsibility to pay the mortgage payments. As trustee, Emma could sell the house, but Brad would have the first opportunity to buy it. More than two years have passed, and Brad has not moved and refused to pay the mortgage.
Brad wants to buy the house, but he cannot qualify for a loan at its fair market value. He pressures Emma to sell it to him at a substantial discount, but other beneficiaries are involved. The trust was silent on how to determine his purchase price. Emma is left personally paying the mortgage while she, Brad and the other siblings disagree over the sale.
In my experience, arrangements like children paying rent or being able to buy a family home cause some of the worst arguments amongst siblings, often leading to litigation. It can be further complicated if the beneficiaries living in the home have mental health or addiction issues, and the trustee sibling may feel responsible for them because they continue to live in the home they all grew up in.
Legacy trusts
Keep in mind, the more strings you attach, and the longer and more complicated your trust document, the more expensive it will be to administer.
Lisa and Mandy’s parents left their main home and a vacation home in what is called a legacy or dynasty trust, which is an irrevocable trust created to hold, protect and pass family wealth across multiple generations.
The trust instructed Lisa to rent out both properties and use the income to support her sister, Mandy. The properties would eventually be sold at Mandy’s death or after 20 years, and the proceeds would fund sub-trusts for the education of future generations. Lisa could be administering this trust for the rest of her life without an allowance for compensation.
The rent income has not been enough to support Mandy. The trust had no other assets to cover the shortfall, so Lisa paid expenses out of pocket. The trust could not afford the CPA or attorney’s help she needed to better understand her role and options.
Maintenance fell behind, and legal problems arose with the properties. The trust’s terms caused Lisa to dig a big financial hole, and it led Mandy to pursue litigation against her sister for breach of fiduciary duty.
Had the trust allowed Lisa to sell the property when the market was high, it would have given her an off-ramp to invest the funds elsewhere for her sister and the grandchildren. At the very least, the parents could have provided more than just real property as trust assets to maintain the trust.
One home for each child
Sometimes an estate will hold multiple properties to ensure each adult child receives a home.
I have seen this often in Hispanic and African American families with which I work. The parents want their children and grandchildren to have a stable place to live, regardless of their work status or the economy. For families who have faced barriers to homeownership, including redlining, passing down paid-for houses is a tremendous gift.
Since 1978, Proposition 13 has kept annual property tax increases low. Other rules allowed many parents to pass those low property tax assessments to their children when they left them the family home or other property.
Proposition 19 changed that.
Now a child generally must make the inherited family home their primary residence to keep the tax benefit, and the home’s value can limit it, even then. Rental and vacation homes generally no longer qualify.
In Los Angeles and along the coast, even an ordinary family home can be valuable enough to exceed the limit. A property tax bill of a few hundred dollars a year could increase into the thousands when the property passes to the children.
Property insurance costs have also increased significantly. In parts of Southern California, finding insurance can be difficult.
A child can inherit a home with no mortgage and still struggle to pay those costs. If parents want the children to keep the house, especially unencumbered, to provide lasting security for future generations, they may now need to set aside more funds to help their family to afford to keep it.
Thoughtful planning
Sometimes, you can keep the strings but still find creative solutions to make your plans work in the long run.
In our first example, my friend Stella did not want her daughter, whom she named as trustee, to sell the house and force her son Jason out. She also knew that Jason might someday want a smaller home or need care elsewhere.
Her attorney suggested naming me as trust protector, and Stella gave me authority to approve a sale if Jason wants or needs to move. His sister can remain trustee.
Having a trust protector gives Jason and the trustee options without the ongoing cost of a professional fiduciary or co-trustee. The trust protector does not have to be a professional, just someone you trust.
Leave your legacy
One thing I love about trust planning is that the estate attorneys can draft trusts that give parents what they want for their children and grandchildren.
But as a trust and estate CPA, I have seen that leaving a home with strings attached means asking a trustee and beneficiaries to live with those conditions long after the parents are gone.
Before deciding who may live in the house or when it can be sold, parents need to consider how their children’s needs and relationships may change, who will pay property taxes, upkeep, and other costs, and build that flexibility into the trust.
The goal is to make sure the gift can still help those it was meant to help years from now.
Michelle C. Herting is a CPA, an accredited business valuation specialist, and an accredited estate planner specializing in succession planning and estate, gift, and trust taxation.