Families look after each other. They pitch in when a member needs help. As an elder law attorney, I see this quite often. It can be an aging parent helping out an adult child in need due to financial difficulties caused by illness, job loss or divorce. It can also be an adult child providing financial assistance to an aging parent who needs care and doesn’t have the funds to pay for it.
Let me give you a typical fact pattern. Mom lives in her home which she owns free and clear with no mortgage. She has very little other liquid assets and is in declining health but wants to remain in her home as long as possible. The family discusses the options. Mom could take a mortgage against her home. A traditional mortgage is not an option because she does not have enough income and/or assets to qualify. She can take a reverse mortgage but the fees associated with it are typically higher than a traditional mortgage.
Instead, the children decide to advance the funds needed to care for mom at home. There is no formal agreement – nothing in writing. Only when Mom’s care needs increase when she moves to a facility and the home is sold does the family take steps to reimburse the children out of the proceeds of closing.
This is problematic for a number of reasons. If Mom hopes to be eligible for VA Aid and Attendance benefits, payments by family members for her care can’t be counted as unreimbursed medical expenses. In other words, the long term care expense that is used to qualify for the VA pension won’t count if Mom herself didn’t pay for the care.
The payments are also a problem if she wants to qualify for Medicaid down the road. If the family is providing regular payments for Mom’s care the State could count the payments as income to her and if high enough when combined with her other income could deem her ineligible for benefits. A greater concern, however, is the repayment at closing. Without a written agreement in place when the children made the payments, any transfers back to them will be considered a transfer for less than fair value and not reimbursement. A Medicaid penalty will ensue. Under new VA rules a VA penalty will also result.
As you can see, this is the wrong way to handle the family contributions. Next week I’ll tell you the right way.