Planning for Aging Relatives and Future Generations
As we enter the holiday season, many of us will spend more time with family, often multiple generations of family. This is an ideal opportunity to have meaningful discussions about what each family member envisions for the future of the family as a whole and for one another. These conversations can be eye-opening and set the stage for better understanding and planning.
Comfort and Care: Planning for Aging Relatives
For families fortunate enough to have elderly relatives, it’s essential to address plans for their care should they become physically or mentally unable to care for themselves. Consider these key questions:
- Do they plan to age in place at home? If so, is this feasible, given their health and ability to maintain the residence?
- Are they considering a move to an assisted living facility? If yes, have you explored local options, potential waiting lists, and proximity to family?
- What if long-term care becomes necessary? Will they rely on private nursing care or Medicaid? Do they have the resources to support being cared for in a private nursing home? Will they be relying on family members for financial support? If relying on Medicaid, have you considered the financial implications, such as the spend-down requirements?
Understanding the current financial situations of elderly relatives and the family members supporting them is critical. Everyone must understand the options and the implications of these decisions – not just financially but also with regard to physical and mental health. Transparent discussions can help identify viable options and reduce financial and emotional stress.
Avoiding Common Missteps in Medicaid Planning
Many seniors gift their homes to children (with the hope) to protect assets and ensure Medicaid eligibility. However, this decision can have unintended tax consequences:
- No Step-Up in Basis: When the home is transferred during life rather than inherited, the heirs lose the step-up in cost basis. This can lead to significant capital gains taxes if the property is later sold.
- Miscommunication About Intentions: Without open discussions, children may make financial decisions based on incorrect assumptions about their parents’ needs or wishes.
For example, hearing that many of her friends had employed this strategy, Mom decided to put the family home into the kids’ names in case she ever needed to qualify for Medicaid. She had heard that Medicaid would sell the house right out from under her if it was still in her name when she needed care. Fears like this often lead people to make these decisions, yet a conversation with an eldercare attorney could have given them peace of mind and other strategies to address their concerns. So, now the three adult kids co-own the house where they grew up. When Mom ultimately passes, since she is not the homeowner, there won’t be a step up in basis on the house. Since the new owners, the kids, don’t live in the house, when the house is ultimately sold, they won’t be able to exclude the (hefty) gains from their taxes.
The irony is that all three of the adult kids say that they wouldn’t have their mother in a Medicaid facility anyway and are now paying for care in a private nursing home. Mom simply did what her friends did – put the house in the kids’ names in case she ever needed to qualify for Medicaid, and the kids went along with it.
Unfortunately, they also didn’t understand the financial consequences of the decision. The transfer, intended to safeguard assets, ultimately created avoidable tax burdens for the children.
Transparency and Expert Guidance Are Key
A lack of transparency about financial assets can also lead to missed opportunities. In another case, a couple transferred their home to their children after a health scare – again, in case the parents ever needed to qualify for Medicaid. Some years later, the husband passed away, leaving not only his pension to his surviving spouse but also a life insurance payout. In addition, there were other significant assets. As it turned out, the couple had planned to make annual financial gifts to the kids and grandkids to help “spend down” their assets. However, the kids, unaware of how much their parents had in income and assets, refused the gifts because they were concerned about how their mother would support herself in the future. In this case, first, there was the belief on the part of the parents that Medicaid would take their home, as well as the assumption or fear that they would run out of money and need Medicaid. Secondly, there was no transparency regarding the financial situation, which might have allowed them to evaluate the likely outcomes better. The same negative tax implications came with having the house in the kids’ names – a lack of step-up in basis at death and taxes on the capital gains when the house sold. In addition, Grandma was denied the ability to see the benefit of her gifts and see her children and grandchildren enjoy them.
Engaging an eldercare attorney or financial advisor can help families navigate these complex decisions. Professionals can provide peace of mind and strategies tailored to unique situations, ensuring all parties understand the financial and legal implications of their choices.
Key Takeaways for Families:
- Start conversations early about future care plans for aging relatives.
- Understand the financial and tax implications of gifting assets, such as homes, to family members.
- Seek guidance from eldercare attorneys and financial advisors to ensure informed decisions that align with family goals.
These discussions can be challenging but are essential for creating a cohesive plan that preserves family wealth and ensures care for loved ones. Have you, as a family, discussed how you would like your aging relatives cared for?
At Infinity Financial Strategies, we help individuals and families make the most of their financial resources while planning for the next adventure and future generations. Let’s start a conversation about how we can help you align your wealth with your life’s biggest goals.