Where should we live? That has stumped Californians Pamela Parkinson, 69, and Tom Josa, 67, as they prepare to wed. She, a divorced psychologist, and he, a widowed physician, now retired, both own houses that are the lion’s share of their respective wealth. As is, however, neither home feels right for living together. Their other concerns: If one of them dies, they want to guarantee that the other can remain where they’ll be living. Selling either residence could result in a huge tax bill on the capital gains. And Tom has two adult children he wants to provide for after his death. “We want to be sure that we don’t do anything stupid,” Pamela wrote.
Some financial matters can be handled by a single practitioner. This one required a kitchen sink of expertise. I turned to Rapid City, South Dakota, financial planner and therapist Rick Kahler; Irvine, California–based estate planner Scott Harshman; and Long Beach, California, accountant Donita Joseph. From their ideas, a plan emerged.
1. Weigh wishes before taxes.
“If there weren’t a tax issue, what would you really want to do?” Harshman asks. “Don’t do something just for tax reasons.” (That’s good advice in almost any situation.) “Don’t lose sight of your number one goal,” he notes. Pamela said they’d either jointly buy a place in their neighborhood or renovate Tom’s home; her house felt too small for them to share, and if they sold a home, it would be hers. If that’s the case …
2. Go house shopping.
The couple toured the few homes for sale in their town but found them wanting. So, I asked how they’d renovate Tom’s house to make it work for them. On their wish list: office space for each of them, and a music room. “We don’t want to downsize,” Tom said. “We want something that we both feel really good about.”
Join today and save 25% off the standard annual rate. Get instant access to discounts, programs, services, and the information you need to benefit every area of your life.
3. Run the numbers.
Pamela and Tom estimated those renovations would cost more than $300,000. The experts say the money could come from the equity in their homes, but how? Pamela would owe substantial taxes if she sold her house, which she bought nearly 30 years ago. (That’s the case even though $250,000 of her profit would be excluded from taxes.) Instead of selling the home, the experts suggest she raise the money by either refinancing the mortgage or taking out a home equity line of credit, then renting out the property.
4. Make it legit.
Pamela and Tom had suspected they’d need a prenuptial agreement, and they do. For that, they each should hire a matrimonial lawyer. They also have to consult a trust and estates attorney to ensure that Pamela won’t be forced to move if Tom dies first and that she (or her estate) is reimbursed for the money she’ll be putting into Tom’s house. Both Pamela and Tom already have living trusts — legal holding pens, of sorts, for assets — which allow for easy distribution after death. Tom’s trust, which holds his house, can be instructed to pass it to his heirs only after Pamela dies or moves. Pamela’s renovation money can be treated as a loan from her trust to his — a loan that will have to be repaid. “Estate planning and a prenup: That’s what it comes down to,” Harshman says.
Pamela and Tom are mulling over the plan. They’re meeting with real estate agents to figure out the rent she could charge for her house. And they’ve started talking to contractors about doing the work on his. They’re looking forward to being together, in the same home, not too far in the future. Merging money and real estate later in life can be complicated — but worth it.
Jean Chatzky is an award-winning personal finance journalist and best-selling author of books including Women with Money: The Judgment-Free Guide to Creating the Joyful, Less Stressed, Purposeful (and Yes, Rich) Life You Deserve.