Combining Households and Generational Portfolios

When you decide it’s time for an aging parent to move in with you or vice versa, there are more things to consider than just whose address you end up at. Multi-generational living has become more popular since the Great Recession of 2009 because of its many social and financial advantages for all parties involved. As Pew Research reports, One-Fifth of America now has multiple generations living under the same roof. Besides getting rid of duplicate kitchen items and deciding who gets which bedroom, combining generational portfolios is also a valuable consideration.

Some families may choose to keep their financial assets separate if the elderly member is still active, healthy, and independent. But at some point, everyone involved may wish to look into such legal considerations as living wills, joint ownership of property, and trusts. It’s always a good idea to consult a financial planner or lawyer who specializes in elder law when discussing your options, but here is a quick rundown of a few financial concepts to discuss with your family members.

First of all, living wills are something that everyone needs regardless of age. It’s not necessarily a financial tool but it’s an essential one as family members get older. Living wills are legal documents in which a person stipulates what medical actions should be taken for their health if they are incapacitated due to illness or injury. This makes sure that each person’s choices for their healthcare decisions be recognized and fulfilled. These legal documents can also take the form of a power of attorney or healthcare proxy, which means that the person legally empowers someone (usually a close family member) to make decisions on their behalf when they are unable to because of debilitating health issues. If you are living with an elderly family member, it is crucial to have such a legal document to provide direction if the family member falls ill or is incapacitated and unable to make such decisions.

Joint ownership of property is a sound way to combine generational portfolios, regardless of which party owns the house or property. This way the property legally belongs to the other party if one party should die or become incapacitated because of health issues. Joint ownership is automatic when a married couple buys a house; if one spouse dies, the property remains owned by the surviving spouse. This doesn’t apply to an unmarried couple or for multi-generational family members; in these cases it becomes necessary to change the title to the property to reflect new choices. This can be done without affecting the mortgage, or a home can be remortgaged with additional mortgagors. If done correctly, the elder generation can be sure to bequeath property to the younger, while the younger ones can live free of financial hardship, contributing their earnings directly into their inheritance.

However, while co-ownership of a property is quite common and beneficial, it can also have unintended consequences, especially in the areas of inheritance, tax and medical benefits. Simple deed-related arrangements cannot on their own substitute for a will or a trust that clearly specifies desired outcomes or other legal agreements and documents that specify what interests and obligations belong to whom, and who can make decisions.

Trusts are an established way of protecting everyone’s assets when combining households. They allow for one person’s assets to be managed and directed in accordance with that person’s wishes. Often called a living trust, these legal documents set up how the person intends to bequeath their assets, which can include property, investments, and other financial portfolios, to other family members or beneficiaries. There are typically two kinds of trusts: revocable and irrevocable. A revocable trust is a good option if a family member is getting older and wants help managing their assets without totally giving up control. Either the benefactor or a third party can act trustee. The trust must be administered according to its guidelines, but all terms, assets and beneficiaries can be changed during the elder person’s life. One advantage of the trust over the will is that no one has to die for it to become effective, and unlike the will, it can account for failing mental capacity before death, which a will cannot.

By contrast, an irrevocable trust essentially moves the assets out of the elderly family member’s name completely and transfers them into the trust, specifying terms that cannot generally be changed ever. The main advantage of such an ironclad transfer of property is the tax benefit: the benefactor no longer owns the property or any income that comes from it. This means that all assets and financial portfolios are now managed by the trustee instead of the elderly family member. This can be advantageous if there are considerable assets or property involved (such as avoiding paying estate taxes). An irrevocable trust can also help your elderly family member obtain Medicaid benefits, if necessary, which may come in handy if they are struck with a debilitating disease or disorder as they age. The financial assets are already transferred to the trust, so they don’t prevent the elderly family member from qualifying or obtaining Medicaid services for their medical needs.

These are some of the main options that family members consider when combining households and financial assets. And if ever there was an area that required professional assistance, this is the area. Nothing in this article should be considered as legal or financial advice. Families should consult legal and financial professionals before making any decisions and for help to construct the arrangements.