Reader Question: My wife and I are elderly and have one daughter that we would like to help with the money we have been able to save. It is likely that one or both of us could be in a nursing home within the next few years. Our money consists of approximately $700,000 dollars plus a modest home worth approximately $125,000/$150,000 dollars and $100,000 of life insurance. The $700,000 dollars is divided into a money market account (approximately 35%), Roth IRA’s (approximately 18%), and the balance would be in traditional IRA’s. We are taking the required minimum from the traditional IRA’s each year. Our wills leave all of this to each other and then to our daughter. Can each of us begin to give $14,000 dollars ($28,000 total) to our daughter each year without tax implications? If we exhaust our funds in a nursing home, for example, within the next 6 years and need to go on Medicaid, can our daughter be required to return the $28,000 dollars that she has received each year? C.G.
Answer: First, you can make annual gifts of $14,000 each to your daughter without any income or gift tax implications. However, according to Birmingham elder law attorneys, Bill Nolan and Ben Stewart of Nolan Stewart, PC, Medicaid does not recognize this IRS rule and will penalize any gift you make within five years of filing a Medicaid application. This penalty is currently equal to one month for every $5,500 you transfer. Although repayment by your daughter can cure the penalty, repayment is not required. However, Medicaid will refuse to pay for your nursing home care until the end of the penalty period.
The key, according to Nolan and Stewart, is to plan in advance. Remember, after five years, a transfer is no longer penalized. While protecting one’s life savings from nursing home expenses is perfectly legal, it must be done with professional guidance. Don’t try it without consulting an Elder Law attorney.
Reader Question: What are the current tax rules regarding the sale of one’s residence? If I understand correctly, only a portion of the proceeds may be taxable, dependent on the sale price. D.D.
Answer: If you are married, filing a joint income tax return, you may qualify for a $500,000 of profit exclusion. If you are single, the exclusion amount is $250,000. To qualify for the exclusion you must meet both an ‘ownership’ test and ‘use’ test which requires that you both owned and used the home as your primary residence for two of the past five years prior to the date of sale of your home. For example, assume you are single and purchased your home four years ago for $200,000. You now sell it for $425,000. The $225,000 of profit falls under the $250,000 exclusion amount, so you owe no taxes. Had you sold it for $475,000, $25,000 would be subject to capital gains taxes (maximum federal tax rate of 15%-20%).
Reader Question: My mother’s bank accounts are all POD (payment on death) to me. My brother and I are beneficiaries on her life insurance, but her home is still titled in my deceased father’s name since it was a survivorship deed. She has a will, and I am her durable power of attorney. Would it behoove us to fund a revocable trust with the house, and the rest will avoid probate as is? Thanks. R.N.
Answer: You could use a revocable living trust and change the ownership of the home from your mom’s name (and your deceased father) to the trust but there may be an easier, less expensive way. Have an attorney draw a deed showing you and your brother as joint tenants with your mother. At your mother’s death, the home will automatically transfer to you and your brother. If you want to make certain your share goes to either you or your heirs, use joint tenants-in-common. If you’re happy for the surviving sibling to receive all of the interest, use joint tenants with rights of survivorship. The costs of drawing a new deed should be nominal.
If you’d like to have me answer your financial question email me at firstname.lastname@example.org and place AL.com in the subject line. Consult your own professional legal, tax or financial advisor before acting upon this advice.