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Variations on a Prenup: Making Multigenerational Homeownership Work

I recently read a New York Times article addressing the growing trend of multigenerational households and the benefits of a so-called ‘prenup’ for this type of homeownership. The reasons for a contractual arrangement about home ownership for families can range from financial considerations to the added support in raising young children.  Here are some of the factors to be considered when thinking about purchasing a home with parents or adult children:

  1. Separate the ‘needs’ from the ‘wants’

When buying a home, many people make a list of the must-haves, and also have a wish list of desired characteristics that are not deal-breakers. This type of list helps to establish priorities and can be very helpful for multigenerational families in the negotiations surrounding the selection of a home.

  1. Will the home be a 2-family residence, or will it include an in-law suite?

An in-law suite normally entails a remodeled portion of the house to house the primary homeowner’s parents (or in-laws, of course). While an in-law suite may feature the same amenities found in an apartment or small house (e.g. full bathroom, kitchen, etc.), the idea of a sectioned off area of the home may leave the parents/in-laws feeling as though the home isn’t actually their own.  Conversely, a 2-family home allows each generation to have a full (and often identical) area of the home, which can increase the overall harmony and interactions among the family. These concepts become less abstract with a site visit and may help clarify what makes a good fit for the family.

  1. Establish a good foundation for communication.

Although multigenerational living lends itself to ideas of one big, happy family living together, in reality this can be an adjustment for spouses and for children (young and old). For example, if one spouse’s parents will be living in the home, the other spouse may not feel as comfortable communicating directly with them. Rather than falling into a routine of, “tell your parents…”, communication preferences and possible obstacles should be addressed as early as possible. Boundaries may need to be established for grandparents and grandchildren.

  1. Think about a ‘house prenup’

In the article I referenced, the author mentions a ‘house prenup.’ As the author describes it, a house prenup would address how the family would handle home-related finances and an “exit strategy” if someone decides to move out. Based on my experience in the area of prenups, I know there are many options for the purchase, management, buyout and sale of a home. The following are issues that could be included in a house prenup:

  • Responsibilities related to house-hunting and working with real estate brokers;
  • Financial responsibilities related to home buying costs (broker fees, inspections, etc.);
  • Responsibilities for carrying charges of the home, including the mortgage, real estate taxes, maintenance and utilities;
  • Use and occupancy of the home;
  • Exit Strategy: A process in place in the event that one party wants to move out;
  • Buyout and Sale Clause establishing each party’s rights regarding triggering a sale or buyout of the other members (See legal issues below).
  1. Review legal requirements and/or issues

In addition to the issues that may be addressed in a house prenup, there are certain legal implications related to multigenerational home ownership. These legal issues include:

  • Legal ownership: Who actually owns the home? Whose name is on the deed?
  • Distribution of proceeds upon sale to a third party.
  • Is there a priority buyout option? If so, what are the terms?
  • Taxes: If one party is paying “rent” to the other to satisfy the mortgage, what are the related tax consequences? If only one party is on the deed, but the other party will be paying part of the purchase price upfront, what are the associated tax liabilities of such a transaction?
  • Zoning: If a home will be remodeled in order to become a 2-family unit, there may be zoning requirements that must be met.
  • Parking: If an additional structure will be constructed on the lot (allowing for 2 separate homes), there may be parking regulations requiring a parking area and/or driveway.

When it comes to buying a multigenerational home, there are considerations for both the home buying/selling process and the ‘home-living’ process. Negotiating a ‘house prenup’ helps the family to address the issues upfront and set the stage for more a more peaceful living arrangement. As with any other important legal document, it is important to seek the advice and counsel of an experienced attorney in the negotiation and preparation of a ‘house prenup’.

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