Siblings buying grandparents' home as first time buyers. Please help me identify our blind spots

An attorney needs to explain and if possible plan for risk mitigation if one sibling undergoes a crippling financial setback or liability.

For example, one of them causes the wrongful death of a third party and is sued for damages far in excess of insurance coverage. One of them incurs a tax liability far beyond their ability to pay, and the IRS wants to seize the house as an asset.

This is not a married couple who are together for better or for worse, so the risk needs to be examined.

Hopefully, the attorney you deal with would ask all these questions (and more). But a few things to think about.

If grandma is still alive, is moving from her house to live with you, and has a $500k home in Massachusetts, my assumption is that she is a person of modest means who is in declining health. If so, you would want to carefully plan for the possibility that she may need to go to a nursing home eventually. For people of modest means, a nursing home stay (which will be in the $15k/month range) will eat through their savings very quickly until they qualify for Medicaid which will pay for the remainder of the stay. Note that Medicare does not pay for nursing homes other than brief stays following hospitalization. But Medicaid has a 5-year lookback period on gifts that would include the proposed $100k in gift equity. Make sure you plan for that contingency and have money set aside for it.

I would also try to plan for what happens if she (or you or your sons) can't handle living together. Plenty of people who love and care for each other would drive each other crazy living together. Particularly when roles are in flux and someone that is accustomed to taking care of her child is being taken care of by that child. The last thing you want is to discover 6 months in that the new living arrangement is driving everyone bonkers but grandma has depleted her estate and has no good alternative and your sons have spent all their savings dealing with a flood in the kitchen (ask me how I know all about that). It may make sense for your sons to rent the house from grandma for a period of time while everyone gets accustomed to the new living arrangements. Of course, the Medicaid look back clock doesn't start ticking until the actual sale.

Has the house been appraised? $500k for a 3 bedroom house and an acre of land in a good school district in a very high cost state in 2025 seems very low. If you're going by something like the value assessed for tax purposes, that may substantially undervalue the property. Either way, you'll want an appraisal to prove the size of the gift for Medicaid and when grandma reports the gift on her taxes. It'll also help minimize taxes for your sons when they do sell.

For the actual purchase, the simplest option would be a joint purchase rather than involving a trust. Two siblings purchasing a property is far more common (and thus far easier to deal with) than a trust purchasing a property. Unless there is some reason that you're trying to avoid this, I'd go with the simple option.

I would make sure that the siblings have an agreement for how they're going to own a house together. What happens when one sibling wants to get married and move in with his new spouse? Is the other sibling going to be willing and able to buy out the married sibling? Can the married sibling force a sale? Would the married sibling force a sale (potentially negatively impacting his brother's living situation) or would he eat half the mortgage payment and build resentment? What happens when the furnace/ AC/ roof needs to be replaced? If grandma is no longer able to live alone, she may not have been keeping up on all the maintenance a house requires for the past few years so there may be a lot of front-loaded expenses. Do the brothers split the cost equally? What if they disagree on what to do (one wants to spend $x to see if they can nurse another year or two out of the old furnace while another wants to spend $y to just replace it with a new one)? What if one son does some DIY repairs/ improvements that the other doesn't want to participate in-- does that "sweat equity" produce some actual equity (perhaps in lieu of paying for some other repairs)? Particularly where there is a decent difference in salaries, these conflicts can sour personal relationships.

And, of course, plan for the standard roommate stuff. Just because your sons lived together as kids growing up doesn't mean that they're going to have no trouble living together as adults. Talk through expectations for overnight guests, having friends over, chore distribution, etc. Any time you're mixing money and family, I'd recommend over-communicating expectations so that, hopefully, no one ends up feeling that they are underappreciated or that they are being taken advantage of.

The discount below market value will be considered a gift under IRS rules, and since it is more than $19,000 per person it must be reported to the IRS by Grandma on form 709. While a gift of this size won't trigger any immediate tax expense, there is a lifetime exclusion of about $14 million and the IRS is picky about reporting and recordkeeping even if a person has no chance of ever exceeding the exclusion.

Also, when computing Grandma's capital gains on the sale of the house, the gift amount will almost certainly have to be added to the selling price to reflect the true proceeds of the sale. Consult a tax advisor.

And finally, it's important to get an independent appraisal of the true market value of the house at the time of purchase, signed by a licensed appraiser if your state licenses them, and to preserve and safeguard this appraisal as tax document. When / if the grandsons sell the house in the future, basis for capital gains purposes can be based on the appraised value, not the amount that they paid. This will reduce their taxes. Again, consult a tax advisor.

The easiest way to do this is to just have them buy the house. Joint ownership and joint mortgages are extremely common; they are normally done by couples, but the principles are absolutely the same for non-couple (or even unrelated) people and you will have little trouble getting a mortgage. It's a real mortgage and so builds credit. A trust is an unnecessary complication.

What you need to do as well is get a lawyer to make up a written agreement stating who is responsible for what regarding the house and mortgage payments, and what happens to the house under various circumstances.

The lender will want the grandkids to be "jointly and severally" responsible for the mortgage, meaning that both are responsible for paying if the other one stops for some reason. The agreement will need to cover what happens in those circumstances

As well as that, circumstances you need to cover include:

• Death of one of the grandchildren;
• One of the grandchildren deciding they don't want to live in the house any more;
• Deciding to sell the house - who gets the profits (or losses).

Your lawyer will tell you of others. It's important to cover all the circumstances even if you think they are never going to happen.

Don't do this.

A $50k gift is a very kind gesture from grandma but the current structure comes with several risks that could turn it into a curse rather than a blessing.

Risks include:

• Your children are in different financial positions ($90k leaves a lot more spare money for mortgage, bills, etc)
• Your children are in a volatile stage of their lives. One or both might soon find a serious partner or want to move away for career reasons.
• Sometimes people fall out with each other
• If one wants to sell, rent, or otherwise change the arrangement then it will be seriously inconvenient for at least one of them (either they will be tethered to the house or forced to move prematurely)
• Selling becomes more complicated for various reasons. They may not agree on price, etc.
• Home improvements might be difficult to agree on. If one person has more disposable income they might want new carpets, a kitchen, an extension, solar panels, etc.
• If one becomes involved in a car accident or similar then the whole house could be lost
• The whole situation is complicated, which makes it easy to overlook a law or tax liability
• The house is not the ideal house for your children. I'm sure it is a nice house but it is not a house that they have chosen and therefore is unlikely to align perfectly with their preferences
• Your children may feel pressured into buying a house when they would rather wait a few years (for whatever reason)
• Grandma might feel that she has a right to dictate how the house is kept. This is a risk with any gift but it is raised because it will literally be "grandma's house"
• Other family members may be resentful. Being "given" a house is very visible and could cause resentment even in cases where other family members got given a better deal.

What could you do instead?

When the time is right grandma can sell the house and distribute excess money as a gift if she feels that is appropriate. If she has decided that she needs $400k for herself then a good formula might be to sell the house for as much as she can, then give your children $50k or half of the remaining money, whichever is lower (e.g. she sells it for $490k then gives each child $45k). This gift could come with strings attached (e.g. may only be used for a house purchase). In the UK you can enforce these strings very easily by giving the gift directly as part of a purchase.

That would give both children the opportunity to buy their own property independently of each other. It also gives them the opportunity to delay the decision, which might be a really big deal if it opens up career choices etc.

There will be a modest cost in the form of estate agent fees. Grandma will have to pay an estate agent and that's money which is lost. Personally I think that is a small price to pay in exchange for your children having control over their own lives.

At current interest rates, an ARM would be ~$3k with tax/ins and similar rentals in our area get $3300-$3500/mo.

Adjustable Rate Mortgages are by nature adjustable and very high risk. They typically have a lower introductory rate to compensate for the increased risk, but this means as soon as that ARM gets its first adjustment the introductory rate will go away and cause the monthly payment to jump up. This combined with the up keep costs of the house can easily outpace the rental costs in your area.

Based on your description, it sounds like you don't expect either grandson to live here for too terribly long. Buying a house is often not a good idea for short-term situations due to the transaction costs, plus your mortgage payments will mostly be interest, not equity. You need to run these numbers carefully. If they only live here (say) for three years and then sell, calculate how much equity they'll have. Don't treat it as a $400k purchase at a discount, though. Treat it as a $500k purchase (or whatever market value is) where grandma contributed $100k to the pot. I suspect the numbers will show the boys getting their $400k back after the sale but what's left beyond that is less than what grandma originally contributed. Essentially, it eats away the value of her gift, which is probably not what wants.

I suggest comparing this to a situation where grandma places the house into a trust that then rents it to the grandsons. You can set rental costs slightly below what they'd pay for a mortgage and it would be close enough to market rate that it shouldn't be considered a gift, especially if the renters are responsible for maintenance. They'd get the same use of the house, pay roughly the same amount, and you avoid all the issues related to one of them wanting to move out, etc. Some of the rental income could remain in the trust and be used to cover maintenance expenses and property taxes but (IIRC) wouldn't be considered her income for tax purposes. The house would also maintain its value and the trust would be bequeathed however she wants. If the boys move out, grandma could even continue to rent it out for extra income while preserving the asset for her estate.

There are a lot of variables involved here (state/local tax rules, whether grandma owns the house outright, whether grandma needs the upfront cash from the sale or would benefit more from the rental income stream over time, etc). I highly suggest you discuss this both with an estate lawyer and with an accountant that specializes in estate planning. I have known multiple people who have used the trust/rental arrangement but what's right for them may not be right for you.