Paul Royal wasn't thinking about his parents when he and his wife, Bonnie, decided to move into Exeter, N.H., from its rural outskirts about two years ago. They had in mind their son, Andrew, then 2, who would benefit later from the good schools and nearby neighbors. But when they came upon a for-sale sign offering a "House of the Future," their perspective changed.
The custom-built home was really two dwellings under one roof: a 2,400-sq.-ft. single-family unit with a 1,400-sq.-ft. mother-in-law apartment in the basement. Although Paul initially dismissed the idea, he realized the setup would be perfect for his family and his elderly parents, who lived 90 miles away. Cohabiting would eliminate the long weekly drive to see them. He and his wife would be right there in case of an accident or a health problem. His son would grow closer to his grandparents. And the separate apartment allowed for privacy: Each part of the house had its own entrance, kitchen, laundry room, and garage space. "It's such a great solution for us," says Royal, a 44-year-old financial planner.
Many members of the "sandwich generation," who now find themselves responsible for the welfare of both their parents and children, are embracing such living arrangements that were more common a few generations ago. "It offers less expensive independent living for older people, and it's very good from a family perspective," says Elinor Ginzler, director of livable communities at AARP.
That said, the move represents a big financial and emotional commitment for an extended family. It involves many hours devising financial plans that work for all parties, talking over difficult end-of-life issues, and ensuring that the entire family buys into the living situation. If substantial assets are involved, the various parties should tap into legal and financial-planning advice. The Royals' experience offers an instructive case study in how to manage such a move.
When Paul broached the subject with his parents, they embraced the idea. Since the $625,000 asking price of the house was almost twice what Paul had planned to spend, their contribution was crucial to making the deal work. The family ended up paying $610,000.
First, Paul and Bonnie put a $20,000 downpayment on the new house, and he and his parents sold the homes they were living in. Paul then took out a $325,000, 30-year fixed-rate mortgage, while his parents set up a trust to hold the proceeds from the sale of their home, plus other assets. (A trust is a traditional estate planning tool that avoids the headaches of probate.) The trust issued Paul a $235,000 interest-only loan at 6.25% to finance the balance on the home. Paul pays the trust $1,300 per month in interest on top of his $2,000 mortgage payment. In turn, his parents give him $2,200 a month in rent.
A legal document directs the trustee to make sure Paul and Bonnie are financially protected under certain circumstances, such as being forced to sell the home at a loss. Paul's parents worked with a lawyer and their financial planner.
Family dynamics came into play. Since his father has early signs of Alzheimer's disease, the trust was set up in Paul's mother's name. However, it took some persuading to reassure his father that this was the right move in light of his diminishing capacities.
Paul also has two sisters to consider: one in Nebraska, the other in New Jersey. The trust ensures that when the parents die, their assets will be equally distributed among the three children. One sister quickly supported the move; the other was lukewarm. Both ended up accepting it. "My parents were very helpful in convincing my sisters to go along," Paul says.
Perhaps most difficult were the many hours of frank discussion about disability and death. What were his parents' wishes if one of them died? What if Dad ended up in a nursing home? "You have to really think about the endgame, more than a lot of people are comfortable doing," says Paul.
Even if the generations agree on a shared residence, you have to check local regulations. Zoning restrictions often prohibit converting a garage into living space, building a backyard cottage, or adding a separate apartment in neighborhoods of single-family residences. Nevertheless, a number of communities are modifying their zoning laws to encourage such dwellings, and AARP is pushing model legislation in jurisdictions around the country.
The combination of increased life expectancy and delayed childbearing mean more families will be facing circumstances like the Royals'. For many of them, the solution will be the same: living in a house of the future.
By Christopher Farrell