In talking with investors, I came across an interesting situation recently regarding a family home with multiple generations living together. A son in his mid-40s and his family of five moved in with his mother, age 73. The home is worth roughly $1.2 million. The matriarch intends to leave the home to her son and leaving her investment accounts and assets to her daughter—also about $1.2 million paying any debts or taxes out of the liquid assets.

While the reason they initially combined households was because of COVID and homeschooling the children, this is something I see when families want to keep a home through several generations. However, while their plan sounds simple—especially since the assets involved fall below the estate tax exemption limit—some of their actions may have unintended consequences for their estate plan.

Their intention was to refinance the home, adding the son and his wife to the mortgage, creating a joint ownership situation between the mother, her son, and his wife. If she is simply adding them to the mortgage, and he is not bringing any money to the table, her share of the equity may be considered a gift. While the value is under her lifetime exemption, this would still require a gift tax return. If the equity in the home is a gift, it retains the original cost basis since the mother is still alive. Should the son and his wife sell the home in the future after the matriarch passes away, they may have to deal with a significant capital gain.

If the son were to predecease his mother, his wife could inherit his share of the home, making her a majority owner. As she is in her mid-40s with young children, it is quite possible that she would remarry. The family home could easily end up in the hands of the wife and her new husband—which defeats the intention of keeping the house within the family. Furthermore, if the house has a mortgage, it’s not worth $1.2 million. Since the mother stipulated that any taxes or debts were to be paid from the liquid assets, it could be interpreted that the daughter would have to pay the mother’s share of the mortgage out of her inheritance. Depending on the mortgage balance, this could significantly affect the value of the daughter’s inheritance.

Another situation they didn’t consider was what happens if the mother lives for another 15 or 20 years? How much of the $1.2 million in assets would she spend down? What if she had a long-term care event that depleted the assets over several years?

This situation illustrates several points. While your estate may not have estate tax issues, how assets are titled and how you bequeath them can still create tax issues for your heirs. What seems equal on paper may not be equitable in practice. A home is an illiquid asset that cannot be split without one heir buying out the other.

I suggested before they get too far down the road that they consult an estate planning attorney to discuss using a revocable trust for the assets with named heirs. Upon her death, the trust would first divide the estate into equal shares among the heirs, then allocate the home to her son’s share. If the value of the home exceeds his sister’s inheritance, the son would have the right to purchase the excess from the trust at the fair market value. Using a revocable trust also accounts for any increase or decrease in value the home or the invested assets may experience before the mother passes.

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.


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