How Should We Structure Home Ownership When We Move In with My Mother?
My mother has recently inherited a house in California from her mother, along with a small IRA. She has offered to let us live in the house, with the intention of building an in-law suite so she can live on-site. We would love to do this but would most likely need a home equity loan to fund the construction. Is a home equity loan the best way to handle this sort of situation? As an alternative, we could purchase the house from her with a mortgage, which would give her the liquid capital to construct the unit. We are concerned about the Prop-13 property tax law, as well as possible issues with her estate in the future. Finally, would having a home equity loan cause potential issues with future medical debts that she might incur?
First, I should say that I don’t practice in California, so I know nothing about the Prop-13 tax. You’ll have to talk with a California attorney or accountant for advice on that.
Second, there are a lot of issues to consider when deciding whether to move in together, including those you mention and others. My law firm has developed a workbook for families to use to make sure everyone is on the same page. You can access it here.
How the transaction between you and your mother should be structured will depend in large part on how you answer the questions in the workbook. For instance, does your mother want the house to pass to you upon her death? Do you have other siblings who should receive a share? What will happen if your mother begins to need care? What happens if the whole living-together arrangement doesn’t work out for any reason?
All that said, if your mother retains ownership of the property and borrows the money necessary for construction, the house will be hers. It will be subject to claim by her creditors, whether they are medical providers or others. On the other hand, there are protections for homeowners to keep their homes even if they have debts. The debts would then be paid when they moved out or passed away.
You don’t say if you were to buy the house from your mother whether you would pay her just enough to pay for the construction of the in-law unit or the full value of the house. If she would be left with no cash, then this would protect the house from claims for your mother’s care, but would leave her vulnerable should the co-living arrangement not work out for any reason. If she were to have cash left over, her situation would be more secure, but the funds in her name could be vulnerable to her medical or other debts.
Finally, you talk about “medical debts” but are you really talking about qualifying for MediCal, California’s version of the Medicaid program? If so, I would recommend that you consult with a local elder law attorney who can advise you on its rules, which are in many ways more lenient than most state Medicaid programs. You can find a qualified elder law attorney at www.ElderLawAnswers.com.
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If your mother is 62 or older, she could fund the renovations with a reverse mortgage. No payments would be due while she is living there. When she passes then you could sell the house to payoff the loan or buy it yourself by getting a new mortgage to payoff the loan. Don Graves is an expert on this and you can read his book for more information.
Thank you, Fred. I believe this is the book to which you refer: “Housing Wealth: 3 Ways the New Reverse Mortgage is Changing Retirement Income Conversations (An Advisor’s Guide)” https://www.amazon.com/Housing-Wealth-Mortgage-Retirement-Conversations/dp/1732027005
I should have also included these:
Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement (The Retirement Researcher Guide Series) https://a.co/d/841nlXU
Home Equity and Reverse Mortgages: The Cinderella of the Baby Boomer Retirement https://a.co/d/07jfZQP