For many California families, the family home is both the most valuable asset in the estate and the most emotionally significant. Parents often assume the fairest approach is simple: if there are three children, leave everything equally to them.
That works reasonably well with cash and investment accounts. A house is different.
One child may want to keep it. Another may want it sold. A third may like the idea of keeping it but cannot afford the property taxes, insurance, maintenance, and repairs.
Without careful planning, leaving the family home "equally to the children" can create difficult financial decisions, and potentially family conflict.
Three Children, One House
Consider a widowed mother who owns a California residence worth $2 million. Her revocable living trust provides that her estate will be divided equally among her three adult children.
After Mom dies, one child wants to keep the house because of its sentimental value. The second wants it sold and would rather receive cash. The third is undecided.
No one is necessarily being unreasonable. They simply have different financial circumstances and different relationships with the property. The trust may say each child receives one-third of the estate, but that does not necessarily answer the most important question:
What happens to the house?
What If One Child Already Lives There?
The situation can become even more complicated if one child is living in the home.
Perhaps that child moved in to help care for Mom during the final years of her life. After Mom's death, the property is not merely an inheritance to that child, it is home.
Does the child have the right to remain? For how long? Must the child pay rent? Who pays the property taxes, insurance, maintenance, and repairs? When can the other beneficiaries receive their inheritance?
A parent's informal statement that "your brother can stay as long as he needs to" may sound reasonable during life. It can be extremely difficult for the trustee to administer after death unless the trust explains exactly what that means.
Equal Does Not Have to Mean Equal Ownership of the House
Treating children equally does not necessarily require giving each child a one-third ownership interest in every asset. If one child genuinely wants the residence, an estate plan can potentially provide a mechanism allowing that child to receive or purchase the home while the other children receive more of the cash, investments, or other assets.
The children may still receive economically comparable inheritances without being forced to become co-owners of the family home.
The challenge arises when the home represents most of the estate. If Mom owns a $2 million residence but has only $400,000 of other assets, there may not be enough cash to equalize the children's shares.
The child who wants the house may need financing or personal funds to buy out the other beneficiaries. This is why liquidity matters just as much as net worth when planning for the family home.
Planning Options for the Family Home
Several approaches can help avoid uncertainty.
Give a child an option to purchase the home. The trust can establish a procedure for determining the property's value and give a beneficiary a specified amount of time to purchase it. The child's inheritance may potentially be credited toward the purchase price.
Use other assets to equalize inheritances. When sufficient cash or investments are available, one child might receive the residence while the others receive larger portions of the remaining estate.
Give a child a temporary right to remain in the home. If a parent wants a child to have time to relocate, the trust can provide an occupancy period and specify who is responsible for taxes, insurance, utilities, maintenance, and other expenses.
Direct the trustee to sell the home. Sometimes the cleanest solution is to provide that the property will be sold if no beneficiary purchases it within a specified period. Clear instructions can prevent years of uncertainty.
Purchase Life Insurance. The parent could also consider purchasing a life insurance policy that pays to the trust upon death to provide more liquidly to equalize between the child inheriting the home and other children’s share.
The appropriate solution depends on the family's circumstances, but making these decisions in advance is usually easier than leaving the children to negotiate them after a parent's death.
Don't Forget California Property Taxes
California families should also consider property-tax consequences before assuming a child can inherit the family residence and simply continue paying the parent's existing property-tax bill.
Proposition 19 significantly changed the rules governing certain transfers between parents and children. Whether an inherited residence qualifies for an exclusion from reassessment depends on specific requirements, including circumstances involving the child's use of the property as a principal residence. This can materially affect whether keeping the home is financially realistic.
A child who wants the house must consider more than buying out siblings. Property taxes, insurance, maintenance, repairs, and financing costs can all affect whether keeping the property makes economic sense. Because California's property-tax rules involve specific requirements, deadlines, and limitations, families should obtain current legal and tax advice regarding their particular property.
The Same Problem Can Apply to Other Real Estate
Although the primary residence is often the property that creates the strongest emotions, the same issues can arise with other real estate.
A vacation home, rental property, beach house, or other family property may also leave beneficiaries disagreeing about whether to keep or sell it, how expenses should be paid, and who should manage it. The broader lesson is that significant real estate deserves specific attention in an estate plan rather than simply being included with "everything else."
Plan for the House Before There Is a Problem
Parents frequently say, "My children get along. They'll work it out." Hopefully they will, but children do not have to be fighting for a problem to develop. If your family home represents a significant portion of your estate, consider these questions now:
- Does one of my children actually want the home?
- Does a child currently live there, and should that child be allowed to remain?
- Should a child have the first opportunity to purchase the property?
- How should the purchase price be determined?
- Are there enough other assets to equalize the children's inheritances?
- Who pays expenses while a decision is being made?
- What happens if no child wants or can afford the property?
The family home may represent decades of memories, but emotional significance does not make a house easier to divide. Simply leaving it "equally to my children" can postpone the difficult decisions rather than resolve them.
A thoughtful estate plan can establish a process for purchasing the home, provide temporary occupancy rights, use other assets to equalize inheritances, or give the trustee clear instructions about when the property should be sold.
The goal is not to predict whether your children will disagree. It is to create a plan that works even if they do.
If your family home, or other real estate, represents a significant portion of your estate, we can help you review how your trust addresses the property and whether more specific planning could make the eventual transition easier for your family.
If you, a friend, or a loved one would like to discuss estate planning, contact our Intake Department at 760-448-2220 or visit us online at www.geigerlawoffice.com/contact.cfm. We proudly serve families throughout California from our offices in Carlsbad and Laguna Niguel.
