In last week’s post I was explaining the wrong way for children to chip in financially to help their parents. The wrong way can cause ineligibility periods for Medicaid and VA benefits. It can also eliminate the ability of the parents to repay the children when they do sell their house.
Let’s go back to my typical fact pattern from last week. Mom lives in her home which she owns free and clear with no mortgage but has little liquid assets to pay for care that will allow her to stay at home. Alternatively, she might need to move to a facility but the family does not want to sell the home, perhaps to avoid capital gains tax or because another family member also lives there.
So, if the children pay for Mom’s care the right way to do it is all about documentation. Without it, the payments will either be treated as gifts to Mom or financial support of Mom. In reality, the family intends these payments to be loans which will be paid back when the home is sold.
The problem, however, is that they need proof that it is a loan. A promissory note is key. A mortgage recorded against the home will further secure repayment. Normally, there would be no repayment until the home is sold. This is in essence a reverse mortgage. Unlike a commercial reverse mortgage, there is no requirement that repayment be made if Mom is no longer living in the home. Another plus is that while commercial reverse mortgages are only permitted on the primary residence, a family reverse mortgage arrangement can help preserve a second home.
So, what happens if the home is sold and Mom must apply for Medicaid? The documentation is proof that the transfer of funds back to the children is not a gift but repayment of the loan. No Medicaid penalty results from the transfer. If VA benefits are needed, the loans will not be considered support or reimbursement of medical expenses.
If the home is not sold until after Mom dies, then the family can take advantage of the step up in basis at death to avoid tax on any capital gains that accrued from the time Mom bought the real estate to the date of her death and if there is a Medicaid lien, as long as the mortgage was recorded the children are assured of being paid back before any lien.
Every situation has its unique facts but the takeaway here is that documentation is the key. Consulting with an elder law attorney well versed in these issues can help families accomplish their goals and preserve family assets.