How to Set Up a Successful Multi-generation Household

Once upon a time, having three generations under one roof was common practice. And, in some parts of the world, it’s still a popular way of life.

Here in the U.S., Pew Research Center estimates that some 64 million Americans—20% of the overall population—live in households that include two adult generations.

And, it’s a trend that appears to be on the rise, and one that was likely influenced by the pandemic.

Nonetheless, there are a variety of reasons a family might consider setting up a multi-generational household.

There can be many financial and familial benefits to cohabitating with multiple generations, but reaping those benefits depends on laying the right foundation to ensure that everyone is both happy and protected.

Depending on the circumstance, a multi-generational family group might include young adult kids coming back home after college, or middle-aged kids who have been laid off from work or have come home to help care for aging parents. Conversely, many people entering their so-called golden years opt to move in with their grown children, sometimes financing the building of an in-law apartment onto an existing home.

Regardless of the specifics, it’s important to plan ahead, and plan carefully. What might seem like a simple enough idea at the outset can become painfully complicated if unexpected changes throw a wrench into the works.

All The Ways Best-laid Plans Can Go Wrong

There are so many different scenarios, and within each one there are many potential opportunities for things to go sideways, leaving some or all family members in an uncomfortable (or even untenable) situation.

For instance, let’s say mom finances the addition of an in-law apartment to the home owned by her son and daughter-in-law.

Is she guaranteed residency for as long as she wants?
How will day-to-day living expenses be covered, and by whom?
If mom needs care, are her son and daughter-in-law obligated to provide that? How will that care be paid for?
If the son and daughter-in-law have kids, does mom automatically become the babysitter?
And, say mom has two other kids—how does the money she contributed to build the addition figure into the inheritances of all her children? Is it considered an advance on the homeowner’s inheritance, a trade for housing?
What if the son’s company transfers him to another state?
What if the son and daughter-in-law get divorced?

As you can see, things can get messy pretty quickly—both in terms of the daily minutia of cohabiting and in terms of the big picture.

The Importance of Getting Things in Writing

One helpful tool is a written “life use agreement” or “caregiver contract.” This document spells out all the details about ownership interest, contributions to expenses, and contingency plans for a variety of possible changes in circumstance.

It might feel a little awkward to establish a legal document to define living arrangements between parent and adult child, but it’s a lot more awkward if there isn’t any agreement and things go off the rails.

One key aspect of these kinds of agreements is to establish the type of home ownership.

There are a number of options, each with its own pros and cons:

- Tenants in Common: In a “TIC” arrangement, each tenant (in this case, mom, son, and daughter-in-law) owns a share of the property. Upon the death of any tenant, that individual’s share goes to whomever they name in their Will as part of the probate process; and if the property is sold while all tenants are still living, all proceeds are divided equally among the co-owners (unless there is another agreement stating otherwise).

- Joint Ownership: Unlike TIC, if one joint owner of a property dies, their share automatically passes to the other joint owners without having to go through probate. Exactly like TIC, any proceeds from the sale of a jointly owned property will be divided equally among all co-owners.

- Life Estate: In a life estate, an individual—usually the parent of an adult child homeowner—is named as a “life tenant,” meaning they have the right to stay in the home until they die. When a life tenant dies, their ownership passes automatically to “remainder men” (anyone the life tenant names) equally. Like joint ownership, this process avoids probate.

- Trust: Placing a home in trust allows for the greatest level of flexibility. The trust can be drafted to capture the exact preferences of the individuals involved to a high level of detail. It can also include contingency plans to cover any time that the original circumstance changes. Trusts also avoid probate.

Don’t give up the dream.

It’s a lot to think about, but that shouldn’t dissuade anyone from exploring the possibilities. There are so many wonderful ways that living in a multi-generational household can improve quality of life for everyone in the house. Being together under one roof can not only be a financially smart move, it can also give family members peace of mind, make it easier to manage care, and provide uncounted opportunities for kids, parents, and grandkids to share their lives.