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My dad passed away unexpectedly and has left my mom alone in their house. I have two siblings and we all have a great relationship which I want to make sure stays that way.

My parent's house is too big for just my mom, and maybe too lonely, and our mom suggested that one of the three children move in with their family and pay for construction to create an inlaw apartment or adding an additional floor. The house is paid off and construction estimates are about $125k. We all think this is a good idea.

We are all trying to be proactive and plan out how we would handle this when my my mom passes. My mom has stated she wants to leave the house to all 3 of us when she passes. How do we make sure this is handled fairly considering one of us will be investing money into the property? Is there a term that describes this? Are there examples of how to plan for something like this.

Thanks, everyone.

  • There are details which are missing that would impact the answer. What is the situation of the family that might move in? They own, rent? How much do homes cost in the area? i.e. is $125K a small fraction of a new home cost or nearly as much as a stand-alone house? Will they (the move-in family) pay that $125K in full? How old is mom, and what is her health? Is the family moving in agreeable to selling soon after mom passes? – JoeTaxpayer Jan 28 at 10:21
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Ok first I'll say that though this may be a good idea for your mom and family, it may not be a good idea financially. And that still may be ok to all of you. I've seen situations like this and in most housing markets an extra $125k spent on renovations doesn't lead to anywhere near a $125k increase in market value. There are markets and situations where it can, but it usually doesn't. Check with a realtor or research your area and housing market carefully to see what the likely increase in value, if any, there would be. Also a renovations almost always cost at least 10% more than the estimate. And in this scenario you have more than 4 people involved in the decisions which tends to drive costs up to try to please everyone.

For how to split the inheritance later you just have to come up with a formula that seems fair to everybody. If the house appreciates in value substantially, does everyone think it's fair that the family that put up the construction costs should get their investment back before the others get their share? What if the house doesn't appreciate much in value? Should the family that puts in the renovation costs get any return on their money or should their mortgage or equivalent costs just be considered their cost of living that they would have payed otherwise?

One way to look at is is say the house is worth $300k for easy numbers. Then everyone's current share is $100k less one third of the selling costs. If $125k is spent on the repairs (say through a mortgage) and the house appreciates by $25k, then there is now $200k less selling costs to split three ways. If it appreciates by $125k, then there is the original $300k less costs to split.

So that's essentially looking at the mortgage costs being the regular cost of living that the family moving in would have. That works as long as that cost is similar to what they would have had.

It's more complicated if the family moving in puts in cash for the renovation, but can be handled similarly. If the family puts in the $125k and the house appreciates by $25k then there is $325k less expenses to go around. The family moving in could get their $125k back and get a share of the remaining $200k. That could be considered fair or not, depending on how you look at it.

So definitely get a current appraisal that is realistic for similar houses are actually selling for. That sets your baseline. Get an idea of how much the house will appreciate for the given market. Work out what's fair from there and given different possible scenarios.

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The entire tax situation makes this question very complex.

The house is 100% paid for. Now one child will be adding 125K worth of construction to the property. Will that 125K be a gift? If this was being funded by the owner the interest could be tax deductible.

What happens if the parent needs the money in the house to pay for long term care? Access to Medicaid could require the house be sold, and the funds used to pay for that care. They probably won't allow 125K of value to be diverted from the assets.

If this is the plan you want, then sit down with a lawyer and tax firm that specializes in the issue of elder law. Knowing your options in various situations will be critical, because they may not happen for decades and you don't want to run into a problem that was easily avoided today.

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This is the same scenario that my family had. In our case the sister moving in was to stay living in the house after my mother died.

Note that this setup seems fair to all the family and in UK had no tax implications. However if the tax rules for inheritance tax differ for houses and money or house does not count to medicare or equivalent this might not be true.

What was done is my mother sold the house to my sister and gifted her her share of the house price (so that my mother could not be forced out of the house she retained a notional share - see a lawyer to draw up the details).
My mother did pay for some of the fittings to the inlaw apartment. My mother altered her will to split here estate equally and then deducting the amount forwarded to my sister from her share.

When my mother died the house was not part of her estate but the proceeds were in the estate. This means that the risk and reward of owning the property was only gained by my sister and she paid the cost of the improvement.

As for risk of house being different this was the UK and in any housing development you will many of the houses with different extensions and possibly tax bands in fact having a difference in the house might be an advantage.

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This is a terrible idea for several other reasons than the good ones that T.M. mentioned.

For one thing the now modified home may command a much higher tax rate and when Mom dies it may be impossible to sell it. Suppose it's a 2000 sq ft home in a neighborhood of 2000 sq foot homes. You do this MIL apartment and now the taxing jurisdiction says "that's a duplex equivalent to 2 1000 sq foot homes your property tax just tripled" Then later on when you sell it even if the buyer rips out the modifications it will be a huge fight to get the tax rate dropped since the taxing authority is going to take the position that ANY remodels including ones to turn it "back" into a single family home increase value. You don't want to be the owner of the ONE house in the neighborhood that's assessed valuation is double every other home, you will never sell it.

Same goes for adding a floor if every other home is a single level and you have the only 2 story one it's going to be a lot harder to sell.

A second issue is that during the time Mom is still alive, the one family is going to be missing out on the equity gain of owning a home that they own outright. They may own a portion of Mom's home but since that's going to be split up when she dies they will only get 1/3 of the equity gain they would have got had they continued to own their own home.

Lastly, the facts of the matter are that in a great many cases, when someone gets older they start having medical issues. If Mom gets dementia 4 years from now and has to go into an assisted care facility then the entire equity of the home is going to go to pay for that and NONE of you kids will see a cent of inheritance. That will really financially screw over the family that moved into the house since they will have NO equity gain in that instance.

The reality is that you hit the nail on the head - Mom is lonely. The fact is that there is no moral responsibility for the children to provide for Mom's entertainment and trust me any of you who try doing this will come to regret it very quickly. In all likelihood unless Mom really loves living in the home for sentimental reasons or whatever, she would probably be just as happy selling it now and buying a condo then taking the extra money left over and rolling it into conservative investments like treasury bills or some such, then finding herself a boy toy and spending some of the extra money on cruises or some such. Then if she does get dementia then the money will be spent and she can just go into a Medicaid home which she won't care about, since she has dementia. Another option is a "retirement community"

Most grief counselors tell you to NOT make any major life changes for 1 year after a major life event such as the death of a spouse. You kids need to realize that this "scheme" is part of Mom's normal grieving process - people often like to jump into new and complex things (like a home remodel) as a way of distracting themselves from squarely dealing with their loss. Mom needs to come to terms with this and figure out her own life going forward and not try to permanently engage one of her kids and their families in this process. Also while you all may communally think this is a great idea I don't see you jumping in to volunteer to be the one, and I'd guess your siblings all privately are thinking that someone else in the family is going to be the one to do it. Unless one of the families is begging to be the one to move in, you are just all telling each other it's a great idea because none of you really know how to support your mother in her time of need.

Good luck on this, and definitely continue to talk privately with siblings WITHOUT mom being involved.

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    There are some good points in paragraph 2, but paragraph 6 includes needlessly provocative opinion. Is there a potential rewrite without the phrases "moral responsibility" and "boy toy"? The digression into dementia is also not connected to anything in the original question. – user662852 Jan 25 at 18:19
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    Yeah, I agree with user662852. You make good points about the property tax and the missing out on the appreciation the family would have owning a home outright. But the changes to the house won't make it impossible to sell. It will just likely sell for less than the previous price + renovation costs. Also in the case of long term care, the equity in a home is protected from being taken to pay for that care last I knew (at least from Medicaid), but any cash proceeds from selling the house wouldn't be. – T. M. Jan 25 at 19:11
  • In my opinion, the question isn't so much personal finance as it it about family interaction. And Ted's remarks do not rise to level of needed mod intervention to comply with our "be nice" policy. On the other hand, he does bring up issues that OP doesn't address. Such as mom's age, and the risk of being on the road to having such issues. So far, this is all grey, and I myself would abstain if there were votes to close, unless the reason was to move to a different stack, in which case, that's a mod chore to execute. – JoeTaxpayer Jan 26 at 20:38

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