April 7th, 2023
Estate Planning Considerations for Multigenerational Households – Consider a Family Limited Partnership
Posted in: Estates, Trusts & Probate Tagged: Micah A. Bonaviri, Sarah J. Broder
Author: Sarah J. Broder & Micah Bonaviri
It is becoming increasingly common for multiple generations of a family to live together, with older and younger family members sharing a home. It can provide many benefits, including assistance raising children, caring for elderly relatives, as well as contributing additional resources towards household expenses. But what happens from a legal perspective when the cohabitation ends? Who has a financial interest in the home, for example? What happens when one of the owners dies or divorces? Does everyone need to move out? Who is responsible for the property taxes?
These questions can be answered clearly with a little planning before establishing a multigenerational household.
A tool that is often utilized in such a situation is the establishment of a family limited partnership (commonly structured as a Family Limited Liability Company, or family LLC) to govern the ownership, as well as overall the rights and responsibilities of the family members as circumstances change over time, and could track partner financial contributions in connection with the home.
Furthermore, the agreement can address how the partners (i.e., the family members) will utilize and maintain the property. If the property needs renovations or improvements, for example, a family member with independent financial resources could provide a loan to the partnership to cover the costs and the agreement could dictate how that partner would be repaid. Alternatively, the ownership percentages could also dictate the amount the partners need to contribute for the general upkeep.
Another benefit to a family limited partnership is that the governing agreement can also dictate what happens if a family member leaves the household (i.e., by death/divorce/choice). Maybe an appraisal should be required to determine the fair market value of the leaving family member’s interest? In that case, the remaining partners could purchase the leaving partner’s interest, or they may elect to sell the home to a third-party purchaser. The agreement can also provide specific terms about who has a right of survivorship to an interest in the home.
Finally, the agreement can also address the implications of a divorce. For example, the agreement could provide that upon divorce, the soon-to-be former spouse of the family member, must vacate the home with (or without) receiving any financial repayment. In practice, this serves the purpose of a prenuptial agreement, or similar arrangement, to address a particular issue, which can avoid unnecessary litigation upon a dissolution of marriage.
Of course, the establishment of a limited partnership has additional advantages and disadvantages which should be considered carefully, both from a practical and tax perspective. It may not always be the proper fit for every family but should be thoughtfully considered with the assistance of an experienced estate planning attorney.