Q: What is the best way for four families to build one shared residence?
We and three other families intend to sell our homes when our kids go to college and build one large custom home on acreage. Should we form some manner of legal entity to pool our money and deal with the builder, etc.?
A: Best way is not to do this. If someone wants or needs out, or life events happen (divorce, death, severe health issues, long-term nursing care needs and Medicaid qualification, to name but a few), then you’ve got a mess on your hands. That’s separate from all the headaches of shares use, contribution toward shared expenses like utilities, taxes, maintenance and repairs (and disputes as to what news repair or replacement) etc. If you can’t be talked out of it, you need at minimum a shared property agreement that addresses all these issues plus a dispute resolution mechanism. A trust or limited liability company may make better sense, incorporating the agreement, to separate each owner from being on the deed together. You will want to address how to avoid counting an interest in the property against an owner’s eligibility for Medicaid coverage in the event of long term nursing care, and how each owner’s heirs are treated upon an owner’s death. Getting four sets of couples all on one page, for the rest of their lives, without conflict, seems a Herculean task. Eventually one, and then another, will have issues that are in conflict with the shared living arrangements. How well you anticipate and address all those issues will be the hard part.
The answer depends in part on whether you need funding (mortgage) or not. Funding as an entity will be different than getting funds as an individual (or couple) for a primary residence. Additionally, an LLC is not a natural person so property held by an LLC will not be anyone's principal residence or get a homestead tax credit. Joint owners can certainly pool together and describe how they will jointly own. If property is owned through an LLC the Operating Agreement should spell out the details for such things as how people put money in to pay for necessary repairs, what happens if someone does not have the funds to pay their "fair share" and what happens if someone wants to move or dies.
While not a typical Western/American concept to have multiple related families living together, there can be numerous benefits so long as the potential negatives are understood and anticipated. I appreciate that the post wants to make sure the legalities are mapped out, it seems that it would be a good idea to sit down with an attorney before getting too far into the purchase.
A: Some families set up a limited liability company to manage family vacation homes. With the appropriate operating agreement that defines everyone's financial responsibilities, and which defines who is responsible for repairs, taxes, insurance, etc., it can work. But be clear, what you are proposing is a family /friend business. And the business is management of the real property. You must consider a worst case scenario where family and friends no longer get along. You must also consider what happens when one or more become ill and must liquidate their interest. There are so many possibilities. But it can be done.
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