It’s not uncommon for people to build a house on their child’s or parents’ real estate property so that the family can live close to each other – but live in their own place. This involves spending, often by the person or people moving in, large sums of money to build a new home. What are the different approaches to achieving this end result and how do they differ.
Every time a person builds a house on a foundation on someone else’s real estate, they are improving the owner’s real estate. The improvement may involve a gift or a loan and, if it is a loan, an agreement involving the repayment of a sum of money and the use of the dwelling. Alternatively, it may also involve buying an interest in the property.
The donation approach can occur when elderly parents move in with their child and build a granny unit on their child’s real estate. The addition increases the value of the child’s real estate and the child’s property taxes increase. The child will have more equity and be able to borrow more against the increased equity. Finally, the building may be subject to claims by creditors related to the child’s unpaid debts and taxes, if applicable. Of course, now that the homestead exemption (against creditor claims) has been increased to protect a minimum of $300,000 (and up to $600,000 in some counties) in equity, depending on the county, this is a bit less of a concern.
A right of occupancy can give the person moving into the dwelling a continued right to reside in the dwelling provided they fulfill their obligations. It can include an occupation duration of up to the life of the occupant. The right of occupancy can be written into the owner’s living trust or can be a stand-alone agreement. Unlike a deed, it does not need to be registered with the county registrar.
Then, with the money lending approach, a promissory note and lien are used to secure repayment of the loan. The lien will take precedence over subsequent liens to ensure that the lender is repaid if the residence is sold or when title passes on the owner’s death.
A child who lends their parent money to build a home on the parent’s property for the child to move in and care for the parent will not have to worry about sharing the value of his parent’s real estate between other beneficiaries (including other children) upon the death of their parents.
With a gift, however, the increased real estate value can (perhaps) provide other beneficiaries in the parents’ estate with an unintended benefit. Therefore, the parent(s)’ estate planning document may provide for the return of the gift upon the parent’s death.
Co-ownership as tenants in common is yet another approach. That is to say, the son or the parent can buy an undivided co-ownership and become a tenant in common with the initial owner. A tenant by mutual agreement between the co-owners can say what the rights and responsibilities of each tenant are with regard to the use of the land and the structures on the land.
The approach that works in a given family situation will vary depending on the facts and circumstances involved. What are the expectations of the parties concerned regarding reimbursement? What protections, if any, do they want regarding the right to live in the residence?
The above is a brief discussion of a larger and more complex topic. It is not legal advice and is not a substitute for consulting an attorney before proceeding.
Dennis A. Fordham, attorney, is a state bar certified specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, CA. He can be reached at [email protected] and 707-263-3235.