It is not uncommon for people to construct a home on their child’s or parent’s real property so that family can live close to each other – but live in their own dwelling. Doing so involves the expenditure, often by the person(s) moving in, of large sums of money to construct a new dwelling. What are the different approaches to achieving this end result and how do they differ.
Anytime a person constructs a house on a foundation on someone else’s real property they improve the owner’s real property. The improvement may involve a gift or a loan, and, if a loan, an agreement involving the repayment of money and use of the dwelling. Alternatively, it may also involve a buying an interest in the real property.
The gift approach might occur when elderly parents move in with their child and construct a granny unit on their child’s own real property. The addition increases the value of the child’s real property and the child’s real property taxes go up. The child will have more equity and be able to borrow more against the increased equity. Lastly, the real property may become subject to creditor claims related to the child’s unpaid debts and taxes, if any. Of course, now that the homestead exemption (against creditor claims) has increased to protect a minimum of $300,000 (and up to $600,000 in some counties) in equity, depending on the county, this is somewhat less of a concern.
A right of occupancy can give the person who moves into the dwelling a continuing right to reside in the dwelling provided they meet their obligations. It can include a term of occupancy up to the occupant’s lifetime. The right of occupancy can be written within the owner’s living trust or can be a standalone agreement. Unlike a deed, it does not have to be recorded with the county recorder.
Next, with the loan of money approach a promissory note and lien are used to secure the loan’s repayment. The lien will have priority against subsequent liens help to ensure that the lender is repaid if the residence is sold or when title transfers at the owner’s death.
A child who lends money to their parent to construct a dwelling on the parent’s real property for the child to move in and care for the parent will not have to worry about the increased value in their parent’s real property being divided amongst other beneficiaries (including other children) at their parent’s death.
With a gift, however, the increased value of the real property may (perhaps) result in other beneficiaries of the parents’ estate enjoying an unintended benefit. Accordingly, the parent(s)’ estate planning document may provide for repayment of the gift at the parent’s death.
Co-ownership as tenants in common is yet another approach. That is, the son or parent may purchase an undivided co-ownership and become tenants in common with the original owner. A tenant’s in common agreement amongst the co-owners can say what rights and responsibilities each tenant has related to use of the land and the structures on the land.
What approach works in any given family situation will vary depending on facts and circumstances involved. What are the expectations of the parties involved regarding repayment? What, if any, protections do they want regarding right to live in the residence?
The foregoing is a brief discussion of a wider and more complex subject. It is not legal advice and does not substitute for consultation with 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, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.
