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Dear Quentin,
My elderly parents decided to move from the east coast to California to be closer to family. Because of the high cost of housing, they came up with the idea of building a granny flat (ADU) in my yard.
I initially had some reservations about it, but it would make it easier to care for them. In the planning process, my parent’s accountant mentioned that paying for an addition to my property is a gift, and asked about the fairness to my siblings, suggesting that the estimated $100,000 cost be deducted from my share of their estate.
I understand that legally it’s a gift to me, but I have several issues with deducting it from my inheritance:
1. The ADU is replacing my parent’s housing expenses, so their housing cost should not come out of my inheritance.
2. This unit is unlikely to increase my property value by $100,000.
3. I will have to pay additional property taxes on the unit even after they move out.
4. In order to get any cash from this unit, I’d have to sell my house or rent the unit to someone else, which would significantly impact my privacy.
5. If I had a choice between $100,000 or an ADU in my yard, I would take the cash.
I considered paying for the ADU myself and charging them rent, but from a fairness perspective, I don’t see any difference between my parents paying me back monthly in form of rent versus paying for the ADU up front, and I run the risk of not recouping the cost.
I should say that my siblings haven’t raised this issue, and none of us need my parents’ money, but I would prefer to make the terms of this clear for everyone, so no one feels like this was an unfair arrangement.
Are there any creative solutions that I’m missing?
West Coast Son
Dear West Coast Son,
I have three problems with this arrangement: 1. Your parents’ accountant suggested this money come from your inheritance, rather than your parents. 2. This proverbial spanner was tossed after you agreed that your parents should build a “granny flat” on your property. 3. You weren’t sold on the idea in the first place, which suggests to me that even without additional complications you could end up regretting this arrangement.
I also see additional downsides to this ADU. They can be convenient for elderly parents to live in and/or weekend guests to stay in, but renting it out could be problematic. Cities, including Los Angeles and New York, are clamping down on such short-term rentals. While $100,000 sounds like a nice round figure, it could quickly end up costing more when plumbing and other foreseen and unforeseen structural conditions are taken into account.
This ADU potentially reduces their living expenses and frees up more cash for your parents to enjoy their remaining years and/or have as a nest egg for long-term health care. As such, that’s $100,000 that your siblings don’t see in their inheritance. At the very least, your parents could pay $100,000, and you agree to take a $50,000 hit on your own inheritance. Without knowing how long your parents would live there, there’s no scientific formula to calculating the dollar value of the trials and tribulations of dealing with this flat.
Given that you already have red flags so early in the process, my only creative solution is to suggest putting a halt on these plans. Treat the ADU as Plan A, outline your concerns and comfort level with both the construction and your parents’ estate planning surrounding the ADU, and ask your parents and their accountant to consider a Plan B. At the very least, exploring the different options should help your parents see what a win-win this is for them. They may come back to you with a better understanding of both sides. Think carefully before proceeding.
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