Passed down McMansion an albatross or a financial windfall?

One money advice column recently addressed a question regarding what to do with an unwanted McMansion passed down from family:

Photo by David McBee on Pexels.com

Dear Pay Dirt,

My husband and I have been struggling to find a house to buy. Despite having a down payment saved, we still pay rent, and the market is insane where we live. My in-laws have several homes and decided to turn their vacation home into their retirement one. After their last renter moved, they offered their old suburban house to my husband and myself for free. It is very generous—unpromptedly so!—but I hate the idea. It was built in the mid-1990s and never updated. It is huge, designed in echo-y open concept style, with half the space barely useable for everyday life. Other than the downstairs master’s, the utility room, and the upstairs bedrooms and baths, there are no doors. You can overhear a normal conversation in any part of the house. The back and front yard are huge (did I mention my husband and I have black thumbs?) The commute would be horrible enough, with the house over an hour away from where we work, but given traffic and the never-ending road construction, that time can almost triple. And the local culture here is barren—no theater, no art, no nightlife unless you want to go to a chain restaurant.

There is no question that my in-laws will be insulted and offended if we reject moving into the house and chose to sell it and use the funds to buy something better for our lifestyle. They will call us ungrateful. My husband thinks we need to take the offer and wait a year or two before selling it. I don’t know—the market can’t stay like this forever, and I do not want to get dragged into a house flip. The commute will kill my mental health. Right now I can walk to work. My husband bikes when he isn’t working from home. There is some sentimentality at play, since my husband spent his last year of high school in this house, and his sister grew up in it. And my in-laws are thin-skinned and very proud. Is this the golden goose or a white elephant?

—House Hunters

Dear House Hunters,I wouldn’t say it’s a golden goose or a white elephant, I’d say it’s more of a “hold your horses” situation. Here’s why. You want to offload the house while the real estate market is hot, and for good reason. It sounds like you’ll be miserable there. No one wants to be miserable, nor should they be made to feel so.  Life’s too short! But I am hearing a lot of reasons why you shouldn’t be living there, not why your husband shouldn’t be living there. It actually sounds like he’d be okay staying there, and stacking some cash. Depending on how much you’re currently paying in rent, you could easily save over five figures. This cash can be put towards the down payment that you currently have saved, but that isn’t enough to get you a competitive offer in your desired area. It could also go towards repairs, to make the house more comfortable, so you could use it as a rental and secure cash flow for your future mortgage payment in the house you actually want.

Also, if you sell the house before living in it for two years, you’re at risk of paying up to 20% of your profit to the IRS. A capital gains tax is a levy on a profit of an investment after it’s sold. One of the items on the list of investments subject to a capital gains tax is real estate. Not to mention, you’d probably make your husband’s life a living hell with his parents if you take the money and run. Who wants that?

You can handle a shitty commute and no museums for a year or two. Offer your husband a compromise, and put a time limit on living in your new digs. Stack the money for over two years. Make enough upgrades to the home that you can charge market value if you sell it—or get a renter, and a cash flow to subsidize your life in your dream house.

Short summary of the advice: you can survive a McMansion for a short time if you can financially benefit from it (and family relationships remain positive).

Two points of this exchange interest me:

  1. The letter writer defines the home in such a way that seems to fit with the moniker “McMansion” applied in the headline. What McMansion traits does this home have? Three are clear here: it is large home with an unpleasant layout located in a suburban area. The relative size of the home is not discussed. The potential homeowner is not fond of such a home.
  2. This is a situation that many younger adults might face in the future. As people age, they may be interested in passing along their suburban McMansions. Do the younger adults want to live in McMansions or would they rather have nothing to do with the actual homes and what they represent? The answer above tries to take an approach in the middle: the home could prove beneficial in the long run even if the younger adults do not wish to stay there long. The McMansion is not shunned but it does have value.

If the younger adults are willing to use the term McMansion to describe the homes of their parents, this could send a particular message about what they think of the house.

Generation gap: younger Americans don’t want Baby Boomer’s heirlooms/stuff

The Chicago Tribune profiles an interesting generation gap: Baby Boomers are worried their children and young adults in general aren’t interested in their family heirlooms and acquired stuff:

Passing down heirlooms from one generation to the next has long been tradition. But Copeland and many other baby boomers fear that their children and grandchildren will end up tossing the family treasures like a worn-out pair of gym shoes.

“A lot of young people are so transient; they don’t stay anywhere very long. They rent apartments and don’t own anything,” said Copeland, whose sons live at home. “They don’t want to be tied down to family heirlooms that don’t mean anything to them.”

Julie Hall, a North Carolina liquidation appraiser known as The Estate Lady, said this has become a dilemma for a growing number of middle-age people who are trying to come to terms with a harsh reality: Often what they consider to be jewels, their children and grandchildren see as junk.

“Though they have the best intentions, boomers have a tendency to keep too much stuff for subsequent generations, though the kids have already told them they don’t want anything,” said Hall, author of the book “The Boomer Burden: Dealing With Your Parents’ Lifetime Accumulation of Stuff.”

There are several social factors at work here which are noted in the article:

1. There are generational shifts at work from those who were alive during the Great Depression to Baby Boomers to Millennials. This affects things like consumption patterns, family patterns, and where people live.

2. We now live in a more disposable, cheaper culture. For example, the story talks about Millennials preferring IKEA furniture. Such goods are relatively cheap, come in a limited set of colors that match a number of things, and can be traded, discarded, given away, or sold fairly easily.

3. It sounds like Millennials are looking to have less stuff in general. While Baby Boomers might consider these things heirlooms, Millennials see it as clutter that must be stored somewhere and moved again in the future. Certain items may have value to a family but what good is it if it just sits there without being used much? The article suggests this may be due to younger Americans living in smaller spaces (while Baby Boomers have plenty of room in their larger homes) but it could also be tied to Millennials placing a higher value on electronics like laptops and smartphones. It has been argued Millennials are more interested in these personal electronic devices than cars and houses, traditional American consumer goods. Also, Millennials would be more interested in debating how someone’s digital files get passed down.

4. The article doesn’t mention this at all but I wonder if this reflects changing family structures. Heirlooms matter not because they are objectively valuable but because they hold sentimental value. Perhaps Millennials have less sentimental interest in objects? A positive spin on this would be that Millennials value personal relationships more but a darker interpretation could be that they simply haven’t had the same kind of deep relationships that would give objectives meaning. Plus, more Americans are living alone and this could make it harder to endow certain objects with enough meaning for a family member to feel the same way.

5. Another thing the article doesn’t suggest: perhaps Baby Boomers had too much stuff to start with. Is this the sort of problem that only arises in a culture that revolves around consumption and materialism?

21st century problem: “Who inherits your iTunes library?”

If you have made a will, don’t forget to include your digital music and ebooks:

Someone who owned 10,000 hardcover books and the same number of vinyl records could bequeath them to descendants, but legal experts say passing on iTunes and Kindle libraries would be much more complicated.

And one’s heirs stand to lose huge sums of money. “I find it hard to imagine a situation where a family would be OK with losing a collection of 10,000 books and songs,” says Evan Carroll, co-author of “Your Digital Afterlife.” “Legally dividing one account among several heirs would also be extremely difficult.”

Part of the problem is that with digital content, one doesn’t have the same rights as with print books and CDs. Customers own a license to use the digital files—but they don’t actually own them…

Most digital content exists in a legal black hole. “The law is light years away from catching up with the types of assets we have in the 21st Century,” says Wheatley-Liss. In recent years, Connecticut, Rhode Island, Indiana, Oklahoma and Idaho passed laws to allow executors and relatives access to email and social networking accounts of those who’ve died, but the regulations don’t cover digital files purchased.

Another reason to buy the physical version if you really like the music or book.

Thinking more broadly, this extends to a whole host of digital content. What happens to your Facebook information if you die? Your Dropbox account? Accessing your email? Stories about these circumstances tend to stress the lack of formal legal or corporate agreement of what should be done. How about a “dead digital user bill or rights”?

The value of inheritances

Megan McArdle talks through issues of inheritance in the United States:

I don’t see by what right people should be allowed to order living people how to dispose of their stuff after they’re beyond caring.  I think people should be allowed to make generous gifts while they’re still alive, without gift tax. (Though I think the recipients of those gifts should have to pay income tax on it; I don’t understand why we’d want to tax income people get by working, but not income people get by being born.  Being born is about the most tax-inelastic thing you can think of.)  But once people are dead, then I can make a pretty compelling case that in a modern economy where extended families are not a major economic unit, there’s little justice case for inheritance…

Inheritance not only hands people valuable income in return for something we don’t really want to further reward–being born lucky–but also, in doing so, it entrenches the least attractive feature of our economy: the fact that people who are born to affluent parents are much more likely to themselves be affluent than children born to the less well-heeled.  Lack of economic mobility is generally regarded as a bad thing that we should combat.
Yet so many of our institutions, from the geographic organization of our schools, to the financial distribution of our inheritances, reinforce it.  Some of those things are not going away (we should not, and will not, order affluent people to move into poor school districts, or shut down research universities for conferring unfair advantages on the mostly affluent students who have the ability to gain admission).  But what are the social benefits that inheritance conveys to offset its drawbacks?  I think they have to be pretty large to justify letting dead people order us to perpetuate the economic status quo.

So I can make a moral case for a 100% estate tax.

McArdle then goes on to talk through specific situations where inheritances might make sense and suggests in the end that she is wary of putting this into practice because it is unclear how it would turn out.

I think her earlier points are of more interest as Americans talk about meritocracy but inheritances seem to go against this ideal. From the beginning, Americans have had the populist idea that class doesn’t matter in the same way that it did in England. We argue that there should be mobility between classes (presumably this also means people can go down), not more rigid classes where money is passed down for decades. But we have a less flexible system than we imagine – some people can move up but the numbers are relatively low. This is exacerbated when we look at disparities in wealth between different groups: wealth is not then just about passing along hard-earned benefits to future generations but rather about reinforcing the large existing wealth inequalities that hamper American society.

I would be interested in seeing more data regarding what Americans mean when they say they want their children to have a better life: does this come from actions during their lifetime, like by promoting education or particular values like hard work, or from an inheritance that is passed along in a will?