Q We are in our 60s and are contemplating selling our large home and adding a "granny flat" of 1,000 square feet to a home owned by our son and his wife. They are amenable.

We would finance the construction because the equity in our present home would be more than enough to cover the cost.

What is the best way to proceed in order to protect everyone's interest, and what should be covered in the agreement our attorney will draw up? A You are wise to be thinking about entering into an agreement with your son and his wife. Even in the best of families, problems and difficulties arise, and it is always best to draw up a written agreement now while you are still talking to each other.

Your question must be answered in two parts: the tax issues and the partnership issues.

First, let's look at the tax issue. On the assumption that you and your wife have been living in your house for three out of the past five years, because you are in your 60s, you are eligible for the once-in-a-lifetime exemption of up to $125,000 of any profits you earned on your house.

When you fill out your income tax return, you will complete a form (Number 2119) titled "Sale or Exchange of Principal Residence," and this will be made part of your income tax return.

You then indicated that you would be financing the construction of the addition. What tax bracket will you be in and are there advantages in having your son and his wife pay the financing so that they can take the interest deductions?

For example, you could lend your son the money and he would pay you interest, just as if you were a bank. While this interest would be income to you, under current tax laws, it would be fully deductible by your son in whatever tax bracket he may be in.

You may also want to consider giving a gift to your son and his wife, and they then could construct the addition using these proceeds.

The tax consequences should be explored, before you make the determination of how to proceed.

The partnership becomes more difficult. There are many questions that should be asked and answered before you proceed with the construction.

What happens if you find that you and your wife cannot live in your son's home? Who owns the addition? Will there be any rent charged you for living in the addition, and if so, how much? Who will pay any increase in utility costs and real estate taxes created by this new addition? What happens if you decide to move out?

Additionally, do you have any other children? And are you probably protecting their interests after your death? While this issue is one we all want to "put under the rug," it is a serious question that must be resolved now.

The last thing you want is to have your other children fighting and bickering over the ownership of that addition. It must be kept in mind that you have taken perhaps your largest asset -- i.e., your house -- and have in effect given it to your son. While this may be your intention, there is an old expression that "when there is a will, there are relatives."

Lawyers are often accused of being too pessimistic. I see my role as attempting to highlight some of the possible "horrible hypotheticals" that can -- and do -- often come up.

We all hope that the relations between parent and child will be smooth. However, this is not always the case, and you are smart enough to be worrying about these matters at this early point in time.

Discuss these matters with your attorney and suggest that your son and daughter-in-law retain their own counsel to resolve these matters.

In my opinion, an ounce of preventive law is cheaper than a pound of cure.