Consider the Financial Implications of a Full House

Many of us struggle with finding enough time — for our spouse, our children, our parents and ourselves. Some days are constant running: from the office to the high school athletic field to our childhood home to deliver groceries, meds or just say hi to our parents. It's exhausting trying to meet everyone's needs, especially while worrying about the increasing cost of everything from groceries to college tuition. You might think it would be easier if you all lived together.

The number of families living in multi-generational households has quadrupled in the past 50 years. According to the Pew Research Center, almost 60 million U.S. residents live in a household with at least two generations of adults, and it seems to be working: more than half of these families report positive feelings about their arrangements.

Home-sharing with your parents may involve moving parents into your home, moving into theirs or even buying a new home that better suits everyone's needs. Whatever option you choose, it's important to sit down and discuss what that will look like before you sign anything.

Raise logistical questions: Who will pay for what? What are the odds that anyone will need Medicaid? If extra care is needed, can it be provided at home? Is it financially feasible to do so? If someone needs nursing care and can no longer pay their portion, could you manage the costs without them?

Eric J. Einhart, vice president of the National Academy of Elder Law Attorneys' board of directors and a partner with Russo Law Group, recommends establishing early on who pays for what, preferably in writing.

"It may not be a legally enforceable document," he says, "but it will be helpful to show siblings or other family members that this was the arrangement, and we agreed on this." He adds that it's also important to acknowledge that things will be modified as situations change.

If you are buying a home, carefully consider the financial implications, particularly when it comes to titling. You have two options: joint tenancy, where ownership transfers to the other party on death, or tenants in common, where each party owns a percentage of the property.

"A lot of people are tempted [to opt for joint tenancy] because they automatically inherit the house when their parents die," says Rhonda A. Visniski-Miller, wealth planning partner in the Falls Church, Virginia office of the firm Whiteford Law. "But a joint tenant is not only responsible for their debt, but also for the debt of the other party on the deed. If you have a creditor that comes after the house, they can put a lien on the entire property."

Einhart points out that some or all of the younger generation may pass first. A joint tenancy would complicate their own child's inheritance.

Maybe you'd rather renovate and sell Mom and Dad's house to pay for it. In this case, Miller recommends drafting a promissory note with the expectation that some or all of it will be forgiven through estate-planning documents. (This loan must charge interest, at least as high as the federal Applicable Federal Rates.)

Another option: consider renting to or from your parents. For any of these, gift tax laws allow you to forgive $16,000 per person each year, whether it's rent, the loan payment or even the interest.

Miller stresses that you consult an estate planning attorney to draft any agreements. "Not a financial planner, not a real estate lawyer," she says. "A very particular expertise is needed for this. You need to understand estate tax, gift tax, how much can be forgiven legally and how to write the document."

She's quick to explain that "filing a gift tax return does not mean you will pay a gift tax, it just means that the value of what you gave that person would count against your total lifetime gift and estate tax exemption, which right now is just under $14 million. For most people, putting their child's name on a deed is not going to incur a tax. But you still have to file a gift tax return."

Einhart suggests considering a trust to earmark the assets of either party. "If Mom is going to live with her son or daughter and they own the property 50/50, her share could go into a trust. That would further insulate it from creditor liability and also establish a clear understanding of what her wishes are upon her passing."

"If Mom didn't intend for one child to inherit the whole house," he continues, "establishing a revocable or irrevocable trust will enable her to very specifically explain what she envisions when she passes."

A trust may also make special provisions, such as a first right of refusal or how to value the property should it be sold. "These kinds of issues need to be worked through and put in a document that Mom had the opportunity to review and modify if necessary."

If older parents expect their new housemates to care for them, Miller says it is crucial that other family members understand the arrangement. Miller strongly recommends a family meeting, where they might say, "Your sister is taking care of me, I'm living in her home, she has paid for the addition, and this is how I'm leaving it."

It's also wise to point out the risk involved — if Mom or Dad need care that can't be provided at home, you may not get your money back or may have to sell your home to cover costs.

"If they are on Medicaid, the house is probably going to be subject to estate recovery," says Einhart. All costs Medicaid pays for long-term care services received after age 55 will be recouped from the value of that home, even if a co-owner is still living in it, through a lien on the property.

Depending on which state you live in, an irrevocable Medicaid asset protection trust may offer some protection. "Anyone who's considering applying for Medicaid should meet with an elder care attorney to go over their specific circumstances to see if it's appropriate. Make sure you're working with someone who knows what they are doing and has been doing this awhile."

Robert Lankin, a financial advisor with Raymond James, points out the importance of smart investments. "Anytime I do a financial plan for people with under $1 million in assets, once you put two years' worth of nursing care in the plan, it blows it up." Long-term care is expensive, he says, so many families resort to the 19th century tradition of family members providing care.

While he recommends investing in stocks rather that bonds, he adds that if you're uncomfortable with higher risks, there are other options, such as a money market or high-yield savings account.

"There's nothing wrong with having a few thousand dollars in your checkbook," Lankin says, "but to keep more than $25,000 or $50,000 in a statement savings in this market is a huge mistake. All of the financial companies have plenty of safe vehicles that earn around 4.5% right now."

While living with your folks can have many rewards, you can't neglect your own financial well-being. Miller says, "Don't own a house or have your parents come into your home if it's not something you or they can afford."

Kimberly Yavorski is a freelance writer who loves finding answers to obscure questions. She has been an avid reader since she was a child and believes that there is always something new to discover and learn, if we only take the time to look. In addition to midlife concerns, her writing covers topics such as parenting, education, history, science, social issues and travel. Read More