Author Topic: Parent wants to sign house over - any experience?  (Read 2708 times)

sheepstache

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Parent wants to sign house over - any experience?
« on: January 31, 2013, 04:43:08 PM »
I've been googling a bunch about this but it just now occurred to me this hirsute, financially-savvy crowd might have some insights.

My MIL wants to sign her (paid-off) house over to us so that her end-of-life care will be taken over by medicaid.  My spouse is an only child and his mom's a widow and she really wants him to leave him as much she can by way of financial assets.   Personally I think this is bullshit.  I think end-of-life care is what your savings and assets are for.  If you want to leave an inheritance, you should be signing a DNR, not a deed.  If I sound cold-hearted it's not just because I am a long ways from having to make these difficult decisions myself but also because her political leanings are very much of the entitled 'the government's wasting money on all these social programs except these ones I use' school. 

Anyway.  I know there is a five-year rule for medicaid records.  And they can go back even further if there are red flags (for example if your house is in your son's name for no good reason probably).  She has some health issues but it is really impossible to know what the timeframe would be for when she wouldn't be able to live independently any more.  I've told the spouse she simply needs to talk to an estate planner to explore her options and get the ball rolling.  She's a little scatter-brained and started talking about this a year ago, so it may simply never come to pass. 

Is an estate planner the right person to deal with this kind of stuff?

And what are the ramifications if we do end up owning the house?  Does it have any tax implications for us or for her?  Right now we own a small apartment but at some point will probably want to get a mortgage for a house, how would it affect that?  And would just signing the house over be the best way or would that trigger a gift tax or something?  Does it make more sense to have her transfer the bulk of her cash assets to my spouse and have him 'pay' her living expenses from now on?

As far as the medicaid rules go it looks like there's no 'punishment' for trying to transfer assets the children, the children simply have to pay the cost of care until the amount is recouped, is that right?  But are you then locked in to whatever medicaid facility is already chosen?  (Obviously if the only medicaid options are terrible, we would simply use our resources to get her something nicer, but she is very much afraid of some catastrphic medical emergency that will wipe out all her funds.)

Arg, so many considerations.  Thanks if anyone has any thoughts.

TN_Steve

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Re: Parent wants to sign house over - any experience?
« Reply #1 on: January 31, 2013, 05:46:56 PM »
sheepstache,

Your misgivings are justified.  I'd refuse to take it in this manner.  Ignoring the obvious ethical issues, it stinks of fraud and even if she makes it for more than five years, the medicaid look back rules are not unlikely to be extended back as government finances get tighter.  If decision is made to do it, I'd bite the expensive bullet and go to a competent tax/estate planning attorney.

Here are some relevant thoughts/questions, though:

How much is the house worth?  Unless it and any other assets are pretty substantial, there shouldn't be much in the way of federal tax considerations, although she would eat into her lifetime unified credit amount of 5mill--and may have to file informational return (I'm not sure on this part).    She and/or you may also face state tax liability, depending upon where you live.

She can, of course, give each of you a gift of 14K (rises with inflation each year) annually, or 28K total.  If you have kids, she can give each of them 14K a year as well--or, give $$ to 529 plans.  Even these legitimate gifts, however, may run afoul of the lookback rules.

I do not specialize in tax law--and I know next to nothing about medicaid rules in this area, but you are right to be concerned.  If you can't talk her out of going this route, I'd get an expert involved--either s/he can convince MIL that she is on the wrong path, or can structure it in a legal way (if possible).   N.B. even though there might not be medicaid law specifically aimed at the son in this situation, there are a plethora of federal criminal laws that could easily be applied to nail a recipient who participates in such a transfer of assets.  proceed carefully.



DoubleDown

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Re: Parent wants to sign house over - any experience?
« Reply #2 on: February 01, 2013, 12:10:21 PM »
Another consideration is the "stepped up basis" of the home when you inherit vs. receiving it outright as a gift (in USA at least). It's almost always better to inherit rather than have the title signed over before death.

Say the house was purchased years ago for $50,000, and is now worth $200,000. Suppose also it's worth $250,000 when your MIL eventually passes on. If you inherited the property upon her death, your basis would be the current value at the time of her death, or $250,000. You would pay no taxes on the increase in value over the years. Or if you sold it one year later for $251,000, you would only pay taxes on the increase in value from the time you inherited it (i.e., you'd pay tax on $1,000 ).

On the other hand, if she gives the house to you now, you will have the carryover basis passed on to you (the original cost of $50,000). When you sell it, you will pay taxes on the increased value ($200,000). This is a major reason never to transfer title before death, and instead pass it as an inheritance.

TN_Steve

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Re: Parent wants to sign house over - any experience?
« Reply #3 on: February 02, 2013, 01:11:09 PM »
+1 for DoubleDOwn.   

Basis step up is a rare freebie under the Code (at least for those whose estate is under the taxable amount).