Putting mom into retirement community. Tax considerations?

[BlueHouse]

Mom is ready to go into a community with more support than just completely independent living.  Luckily, we've found one that we love and that she loves.  Unfortunately, it's pretty expensive, but we (two of her children) are in a position to help out. 

There's an initial buy-in deposit and then a monthly service fee. 

Mom's current assets are (in round numbers):

Pension:  $1750/month
SS:         $1650/month
Ins payout:$400/month
Total:     $3800/month
IRA :             $135K. 
Home equity: $160K (conservative guess) 


Future:  Retirement community buy-in:  ~$350K cash, up front.  This is not a mortgage and there's nothing collateralizing it, so it must be cash.
Future:  Retirement community monthly fee:  (includes a lot, even 1 meal per day):  $2700/month

Her monthly pensions/SS/LI will cover the monthly service fee with a little bit extra.  We will likely contribute a monthly allowance to give her some flexibility and entertainment.

She has already withdrawn $10K from her IRA this year (so she now has $135K left).  We need ALL of that money + ALL of her home equity (+ contributions of about $70K from us) to meet the buy-in deposit. 

Should we take the distribution from the IRA all in one year or take part now and part in January (considering her income for 2019 between SS, pension, and $10K in distributions will be 55,600)? 

Are there any other considerations we should think about? 
For our $70K contribution, should we split it up between years and between siblings too?  Is this a non-taxable event or is there a gift tax we need to worry about?  (They will check finances closely, so they'll know the money isn't all coming from her accounts). 

This is all new to us and happening at a much faster pace than we had planned.  Any advice will be helpful, even if it's just to say we're crazy.

 

[mozar]

At first blush it seems crazy. I'm curious what amenities this place provides besides one meal a day. Is it Riderwood in md? You said you live in DC.
Do they increase services if the person needs more over time?
 That makes more sense if she needs to get in now. On the one hand it makes sense to go now while she's healthy.  On the other hand that's her entire nest egg plus some of yours. Yeah I would split all gifts and withdrawals across 2019 and 2020. I'm assuming your mom isn't going to be able to sell her house until spring.
ETA it must not be riderwood because it's a lot cheaper. Does this place refund the money if mom moves out?. I'm assuming your mom isn't mustachian and likes fancy services if you can afford to support that than go for it. My mom would love that.

[GizmoTX]

Is this a CCRC? Does it return a majority of the buy in when your mother passes on? Our MIL moved into one of these communities at 90, & I'm convinced it lengthened & improved her life. When she died at 99, 90% of the buy in was returned to us immediately without having to sell her apartment. She hadn't sold her house when she moved in, so we & the 2 siblings paid the deposit. There may have been bridge financing. I'm not sure how it was structured, but we did not pay gift tax.

[BlueHouse]

I'm curious what amenities this place provides besides one meal a day.

One meal + all utilities, basic cable, many free activities and clubs that she'll really benefit from, Health club including pool, etc.  The meals are in any of 6 (soon 9) restaurants on site. 

Is it Riderwood in md? You said you live in DC.
Do they increase services if the person needs more over time?
 That makes more sense if she needs to get in now. On the one hand it makes sense to go now while she's healthy.  On the other hand that's her entire nest egg plus some of yours.

There are increased services as needed.  She's kind of healthy, but her mind is going fast.  We think there's a depression involved and she just started an antidepressant so we're hoping for improvement.  But we know she's terribly lonely because she just sits inside a lot of the time.  She's very sociable but her memory and health have slowed her down enough that she doesn't feel comfortable going out with her healthier friends.  She feels so comfortable at the retirement community because there are people of all different abilities and social workers everywhere and many of the healthier people volunteer their time with those who need a bit of help. 

Does this place refund the money if mom moves out?. I'm assuming your mom isn't mustachian and likes fancy services if you can afford to support that than go for it. My mom would love that.

If/when the monthly service charge exceeds her monthly income, then they start to take from the buy-in deposit.  When that's gone, she goes on "benevolent care", which means they'll never kick her out.  Whatever's left in the buy-in deposit, we get back 90% back. 

Is this a CCRC? Does it return a majority of the buy in when your mother passes on? Our MIL moved into one of these communities at 90, & I'm convinced it lengthened & improved her life. When she died at 99, 90% of the buy in was returned to us immediately without having to sell her apartment. She hadn't sold her house when she moved in, so we & the 2 siblings paid the deposit. There may have been bridge financing. I'm not sure how it was structured, but we did not pay gift tax.

Yes, I think that's what they call it.  yep, same 90% here.  Everyone there says it improves & lengthens lives.  Having a clearer view of how unhappy she's been the past year or so, I'm thrilled that she's so excited about it. 

The community is an Erickson community at Ashby Ponds.  It reminds me of a college campus, but only the classes you want and tons of free things to do. 

[BlueHouse]

Another question: 
If she takes out all of her IRA to invest in this Retirement community, is it still taxed at regular income tax rate?  Is there any loophole to try to keep more of that money?

[robartsd]

Another question: 
If she takes out all of her IRA to invest in this Retirement community, is it still taxed at regular income tax rate?  Is there any loophole to try to keep more of that money?

It would be nice to be wrong, but I think so.

2019 taxes:
15% of SS is not taxable. Also check to see if the $4,800 from insurance counts as income.
$55,600 (total income stated by you) - 2,970 (non-taxable SS) - 12,200 (standard deduction) - 1,650 (senior standard deduction) = 38,780 taxable (near the bottom of 22% bracket).

Taking all of the IRA in 2019:
~$43,720 remains of the 22% bracket for 2019. The next $75,000 comes from the 24% bracket, the remaining ~$16,280 would be taxed at 32% if taken in 2019. Total income tax on the $135k IRA withdraw would be about $32,830, an effective rate of 24.3%

Taking half in 2019 and half in 2020:

2019:
~$43,720 remains of the 22% bracket for 2019. ~$24,780 would be taxed at 24% in 2019.

2020 (using 2019 tables):
Pension + Insurance + 85% SS = $42,630 - 12,200 - 1,650 = 28,780 taxable (mid 12% bracket).
~$9,920 remains of 12% bracket, $43,800 in 22% bracket, remaining ~$13,780 in 24% bracket.

About $29,480 in taxes on the $135k IRA withdraw (effective tax rate of 21.8%) saving about $3,350 in federal income taxes by splitting between two tax years.


If you can find other sources for about $40k, you can avoid the 24% brackets. The $40k could likely be paid back with withdraws in 2021-2025 that fit within the 12% bracket saving another $4,800 in federal taxes.

[BECABECA]

The gift tax exclusion is $15k per person per year, so if you’re married and your sibling is married, then each couple can contribute $30k per year tax free. So split across two years you could each give $60k of the $70k contribution tax free. If any of you have kids, you could probably gift the final $10k to a kid and then the kid could gift it to your mother.

[robartsd]

The gift tax exclusion is $15k per person per year, so if you’re married and your sibling is married, then each couple can contribute $30k per year tax free. So split across two years you could each give $60k of the $70k contribution tax free. If any of you have kids, you could probably gift the final $10k to a kid and then the kid could gift it to your mother.

For most people, exceeding the annual exclusion limits just means a bit more accounting. If you want to give more, you can use some of your lifetime exemption of $11.4 million. At death, the remainder of the exemption is used to shelter your estate from taxes.

[twe]

Depending on the way the buy in is structured, some of it may be tax deductible. Also, a portion of the monthly fee will most likely be tax deductible-specifically the part that applies to health care. My guess is 10% of the entrance fee will be deductible (the non-refundable amount), plus 20-25% of the monthly fee. I went through this with my grandmother. She started in something similar to what you describe, moved up a level of care where the monthly fee was about 50% deductible, and now is in memory care where the monthly fee is about 90% deductible. If I'd known 10% of her entrance fee was deductible the first year, I would have taken a larger distribution from her IRA because it would have been tax free.

I recommend asking the community about the deduction. They should provide a yearly letter stating what amounts are deductible under for health care expenses. If so, and it is 10% of the buy in, I'd do the math on how big the deduction would be this year and how big next year from the monthly payments.

Something else to consider is that pushing AGI above certain thresholds will increase her Medicare premiums so if you balance withdrawals to keep them under the limit you'll save a few thousand dollars each year (but it resets each year so is only a 1 year premium increase). https://www.ssa.gov/pubs/EN-05-10536.pdf

[BlueHouse]

Another question: 
If she takes out all of her IRA to invest in this Retirement community, is it still taxed at regular income tax rate?  Is there any loophole to try to keep more of that money?

It would be nice to be wrong, but I think so.

2019 taxes:
15% of SS is not taxable. Also check to see if the $4,800 from insurance counts as income.
$55,600 (total income stated by you) - 2,970 (non-taxable SS) - 12,200 (standard deduction) - 1,650 (senior standard deduction) = 38,780 taxable (near the bottom of 22% bracket).

Taking all of the IRA in 2019:
~$43,720 remains of the 22% bracket for 2019. The next $75,000 comes from the 24% bracket, the remaining ~$16,280 would be taxed at 32% if taken in 2019. Total income tax on the $135k IRA withdraw would be about $32,830, an effective rate of 24.3%

Taking half in 2019 and half in 2020:

2019:
~$43,720 remains of the 22% bracket for 2019. ~$24,780 would be taxed at 24% in 2019.

2020 (using 2019 tables):
Pension + Insurance + 85% SS = $42,630 - 12,200 - 1,650 = 28,780 taxable (mid 12% bracket).
~$9,920 remains of 12% bracket, $43,800 in 22% bracket, remaining ~$13,780 in 24% bracket.

About $29,480 in taxes on the $135k IRA withdraw (effective tax rate of 21.8%) saving about $3,350 in federal income taxes by splitting between two tax years.


If you can find other sources for about $40k, you can avoid the 24% brackets. The $40k could likely be paid back with withdraws in 2021-2025 that fit within the 12% bracket saving another $4,800 in federal taxes.

Thanks so much for this.  I made up three scenarios using her exact figures and was able to get close to your figures to verify that I'm doing it right.  I added in her dividend income and didn't even know about the Standard senior deduction, so I appreciate that info!   

[BlueHouse]

Depending on the way the buy in is structured, some of it may be tax deductible. Also, a portion of the monthly fee will most likely be tax deductible-specifically the part that applies to health care. My guess is 10% of the entrance fee will be deductible (the non-refundable amount), plus 20-25% of the monthly fee. I went through this with my grandmother. She started in something similar to what you describe, moved up a level of care where the monthly fee was about 50% deductible, and now is in memory care where the monthly fee is about 90% deductible. If I'd known 10% of her entrance fee was deductible the first year, I would have taken a larger distribution from her IRA because it would have been tax free.

I recommend asking the community about the deduction. They should provide a yearly letter stating what amounts are deductible under for health care expenses. If so, and it is 10% of the buy in, I'd do the math on how big the deduction would be this year and how big next year from the monthly payments.

Something else to consider is that pushing AGI above certain thresholds will increase her Medicare premiums so if you balance withdrawals to keep them under the limit you'll save a few thousand dollars each year (but it resets each year so is only a 1 year premium increase). https://www.ssa.gov/pubs/EN-05-10536.pdf

We will ask.  I hadn't considered that at all.
I know nothing about Medicare, so I'll have to look into that.