All Things Fair in Family and Estate Wills

Hi BPN, hoping you can weigh in on how to prevent or minimize a future estate battle here! My sibling and I rent properties that are owned by our parents, both of which they placed in a trust. One of the properties (A) is a single family home and the other property (B) is a duplex where one of us lives in one unit and our parents live in the other. My parents’ intention for these properties is to keep them in the trust until they both pass, at which time both properties would be given to my sibling and I as a 50/50 split (so let’s say if property A was worth significantly more than B, and we decided to each take one of the properties, the settle up would look like one sibling buying out the other’s share based on the difference in appraised value). 

My partner and I are interested in undertaking a large remodeling expansion for the property that we live in, which would increase the square footage in adding a junior ADU, an outdoor deck, and updating the kitchen and bathrooms. Due to the extensive nature of the renovation, my parents have suggested that we finance the remodel, which we are OK with, since we would have more control over the timing and design. They are also fine with ceding that oversight to us. What we are struggling to figure out is how to structure this outside investment in a way that makes the execution of the trust fair for both siblings. 

The first idea is to treat the renovation funds we put in as a loan to my parents/the trust, which would get paid back to me and my partner, with interest, before the trust is executed. Timing, structure, and interest rate of this loan is not yet decided, but the current thought was floated to benchmark the interest at prevailing banking lender rates. 

Another idea is to consider the increase in appraised value to the property as ‘owned’ by us. So for example, if the property is currently worth $1 million and our renovations raise the value to $1.5 million, we would ‘own’ the 500k increase, aka 33%. At the execution of the trust, the remaining 66% of the property would be split 50/50 between siblings. Other implications such as property tax have not yet been discussed.

I imagine there is a legal professional that could help us implement all the details, but I’m not sure if they would also be able to suggest/help brainstorm plans and identify any pitfalls or edge-case scenarios. That is where I was hoping you, dear BPN reader, might come in.

The main goal in deciding what structure to pursue is promoting fairness between siblings and to minimize the possibility of an estate battle. Should my sibling also be interested in a major remodeling project at the property they live, the same offer would be available to them. 

What is your critique on either of the ideas presented above? Does anyone have experience with this situation, estate battles, or alternative ideas to offer? What else might we not be considering (that we should)? Appreciate any advice you can give, and any professional referrals that specialize in this stuff. 

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I speak from recent experience as the spouse of someone who with their siblings, inherited a house in California that one sibling wanted to buy from the others. There were negotiations over the value, and the impact of deferred maintenance, plus how to do the "buy out" with tax implications for the sellers. It wasn't a great experience although the sibling who wanted to buy it prevailed. This sibling had previously proposed something a little more along the lines of your situation, with the other parent's house 10 years ago and it also created some bad feelings. Anyway, in your case, the issue that jumps out to me is you funding these improvements really stakes your claim to this property and is your sibling truly emotionally okay with that? If it's going to be worth a lot more than the other, what if your sibling needs the cash from its sale after your parents are gone; will you be able to buy them out on their timeline? Is it fair to essentially stick them with being the landlord on the duplex property? Even if they say yes today, what about 10 years down the road if they have a different family situation?

I personally would not invest hundreds of thousands of dollars in a property that I didn't own due to the risk of my sibling needing the liquidate down the road, or the trust assets being needed for your parents as they age further.

Sibling equity consideration - The loan scenario you contemplate would have you double-dipping - you get paid back for your loan PLUS you get the entire value of what you loaned the money to create... actually triple-dipping, because you also get the enjoyment of the improvements. If you do the loan to the trust, you should not get the entire value of the improvements. The trust would keep that value. And are you also going to collect rental income from the JADU?

The property tax will go up, as you say, because the ASSESSED value will increase by the amount of the construction permit's value. Look at the current property tax bill to estimate that impact. The appraised value could be based on a lot of factors, not just the work of the renovation, so it wouldn't be fair to take all that increase for yourselves.

My question is “Will your sibling have the means to buy you out if you do this renovation?” If they can’t and are forced to move, this could be very destructive of your relationship, and also of your parents’ intentions to provide you both with housing. 

A friend of mine did the same thing.  

She had a small house on a piece of property on her parents' large lot.  To protect her interests and investment of creating her home and to preserve the interest of her 4 siblings, when her parents died (how to separate the parents' land and home; how to create a separate parcel for my friend, the home she built so she could assist in their care) requires an estate planning attorney with an excellent tax background.  I believe my friend's attorney is retired.  Our family used Jeff Levi at Fennemore Law in Oakland to divide our late parents estate.  

You pose an intriguing problem.

My background is:  UCB engineering degree; veteran of having built our own house in Oakland as owner-contractors; licensed real estate broker (retired); and co-trustee of my late MIL's Winchester Mystery Trust.

Top down analysis:

You and your trust-mates (parents, sibling & spouse) own a duplex and a single-family residence (SFR). You propose extensive renovations to the duplex to add an ADU, making it a triplex. How will this affect the eventual trust settlement?

Assuming that you complete the renovations, no one has been disowned, and no one has committed murder - assess the increased valuation of the now-triplex. You subtract the cost of construction and the loan interest. That number is the added equity.

Assuming that your parents' trust divides the assets evenly between yourself and your sibling,  you add the valuation of the renovated triplex and the SFR  together and divide by 2. 

Start with the present valuation of the property. Get appraisals or brokers' opinions of value for both structures before doing any work. Appraisals are not precise measurements; they are opinions of value, legally valid for 24 hours.

Obtain structural pest reports for both the duplex and your sib's SFR.

The initial value for each property is best-guess valuations minus the structural pest work, roof, etc.  Probably also the sewer lateral.

Plan the construction, with escape hatches for everyone except for yourself. Living in a construction zone is stressful and unhealthy!

Cost out everything, then increase the amount by 10% for contingencies. 

Carefully, carefully evaluate what type of loan product you obtain.  Unless it is YOUR name on the title, if it is your parents' revocable trust, they will probably need to sign for the loan - thereby encumbering their asset, for which they have toiled.  Who is the trustee and executor? Personally, as the parent i would NEVER agree to such a deal!

More on loans:  Home Equity Lines of Credit require that you start making payments almost immediately on whatever you have spent. Can you cover this?  What if someone loses their job?

Construction loans carry a higher interest rate and burdensome requirements that you finish by a certain date. The building inspector will need to give the final approval by that date.  Beware. The construction lender may either micromanage or require that you have a general contractor manage the budget. That won't guarantee operating in the black.

(Back when we built our house, we were allowed to act as general contractor and pay the subs. The general we hired to build the weathertight shell and rough plumbing relentlessly overran his line items. He went broke, after I would not agree to pay for his overruns not included in the contract. We came in on time and on budget.)

Returning to my advice:

Prepared to go deeper into the land of Risk, open up the walls and see whether there is dry rot, termite infestation, foundation cracks, toxic mold, or other expensive problems that ware not in your budget.

OK to proceed?  Ready to make loan payments and manage the contractors?

Do you intend to live in the construction site?  Do your parents?  Can they move out for the duration, taking the pets?

Unless your partner is a builder themselves, I can't see that this would be much fun for them.

Yes, this may be do-able, but it could take 2 - 3 years. Good luck!