Another Home Deeded To Kids

[JenMO]

Parents deeded home to kids. Parents went to nursing home and since died. The kids have had the house for sale for 21/2 years before the parents died. (No one lived in the house during this time) Now the house has sold and one kid wants me to do their taxes. I feel since they had the house for sale before the parents died, there was no deemed life estate. So, they would be liable for capital gains tax, basis the same as parents, NO stepped up basis. Is my thinking correct?

[JohnH]

Ask them if they understand the term, "Hillbilly Estate Planning"...

[jimmcg]

From the facts given sounds like a gift with a carryover basis. If these are the only facts then another example of how some astute tax planning would have been beneficial.

[TaxLadyinPA]

Think you also need to check....

I've had a couple in the past where parents deeded the house over to the child.
The lawyers would tell them to sell the house to the child for $ 1.00 and avoid inheritance taxes. They never told them the income tax consequences.

Think you need to check that out because if they purchased a home for $ 1.00 then their basis is just $ 1.00 plus of course any closing costs, etc. that they themselves may have paid to have it done.

[erchess]

Two Questions

How much tax theory including what could have been done do you tell this potential client? I usually tell them everything but I have had the unpleasant experience of seeing them go to another preparer and maybe it is nasty of me but I tend to assume that they listened to what I told them and told the new preparer a different story.

This is for my information. My parents own a home and 40+ acres of rural mountainside that my Grandfather bought for 3K in 1933. He died leaving it to my Grandmother who died leaving it to my Mother who holds full title. I should be able, if I need to, to determine its FMV at the time mother inherited it. What is the best way for it to pass to me, their only heir? I am aware of two pitfalls. One is that if they have to spend enough time in a nursing home that their LTC Insurance, income, and investments give out then we would lose the house as one or both spent down to Medicaid. The other pitfall is that if they gave it to me then number one I might make them move out (I wouldn't really but my Mother does not believe that and it is going to be hard enough to sell her on the idea that she can retain life estate for herself and Dad) and two my basis would not be stepped up from its value in the late 1980s when my grandparents died. I believe that if they went into a home after gifting the place to me within the previous three years the law would still take the place from me. Would that factor be any different if they sold the place to me for its FMV while retaining life estate? In short, what tax planning advice would this board give us assuming that the first goal is to guarantee that they live in it as long as they want no matter what I say or do, that the second goal is to maximize the probability that I get the property when they are gone and that the third goal is to minimize total tax? The total value of all they possess is around 225K and 215 of that is house and land.

[solomon]

Parents deeded home to kids. Parents went to nursing home and since died. The kids have had the house for sale for 21/2 years before the parents died. (No one lived in the house during this time) Now the house has sold and one kid wants me to do their taxes. I feel since they had the house for sale before the parents died, there was no deemed life estate. So, they would be liable for capital gains tax, basis the same as parents, NO stepped up basis. Is my thinking correct?

Don't forget IRC § 1015(d)(6) - if gift tax was paid.

(6) Special rule for gifts made after December 31, 1976

(A) In general

In the case of any gift made after December 31, 1976, the
increase in basis provided by this subsection with respect to
any gift for the gift tax paid under chapter 12 shall be an
amount (not in excess of the amount of tax so paid) which bears
the same ratio to the amount of tax so paid as -

(i) the net appreciation in value of the gift, bears to
(ii) the amount of the gift.

(B) Net appreciation

For purposes of paragraph (1), the net appreciation in value
of any gift is the amount by which the fair market value of the
gift exceeds the donor's adjusted basis immediately before the
gift.

[Lion]

Ltc

We had a financial planner speak at the most recent CtSEA meeting. He said if you have $XXX,XXX of LTC insurance and draw down all the benefits, then you get to shelter the same $XXX,XXX of personal assets, such as your house or IRA, from spending down to qualify for medicaid. So if one spouse goes into a nursing home uses up all his/her LTC benefits, he still gets to save the house or IRA or whatever he chooses for the other spouse or beneficiaries while qualifying for medicaid.

[Gretel]

Ercess, just one little correction in your post: I think Medicare now can go back 5 years, which was previously done only for trusts. At least this is what they want to do.

I don't think there is a good answer valid for everyone, it all depends on your priorities in life and what you believe in. As well as you can believe in getting sick and having to go into a nursing home you as well can believe in living life to the fullest and not to assume you will end up in a nursing home. Obviously then you also would assume you inherit the house.

Besides that, I really have difficulty with all the Medicaid avoidance stuff. What's wrong paying for the nursing home if the funds are available?

[erchess]

Gretel's Question

Re Medicaid - I don't make the rules but I do feel morally free to choose among my legal option the ones that are in my best interest.

[joanmcq]

Do you really want your parents to go to a medicaid acceptable nursing home or do you want them to be in a nice place? Under medicaid, you don't get to choose the place and the bottom rung homes are not where you'd want to be if you had any choice. All of these planning schemes to get the taxpayers to pick up nursing home costs never discuss the qualify of care available for the destitute, which is what medicaid is for. If it gets down to it that keeping the family home is that important to you, you may want to pick up mom and/or dad's tab or buy the place. You may be morally free to choose the best option, but the laws are in place so that I as a taxpayer are not subsidizing your inheritance.

Even if my dad had outlived his LTC insurance I would NEVER have put my inheritance above keeping him in a place that was clean, pleasant and comfortable with quality care and assistance available to his need level. And he paid for his own mother's nursing home rather than have her in a medicaid institution.

[DTS]

erchess

Do you really want your parents to go to a medicaid acceptable nursing home or do you want them to be in a nice place? Under medicaid, you don't get to choose the place and the bottom rung homes are not where you'd want to be if you had any choice. All of these planning schemes to get the taxpayers to pick up nursing home costs never discuss the qualify of care available for the destitute, which is what medicaid is for. If it gets down to it that keeping the family home is that important to you, you may want to pick up mom and/or dad's tab or buy the place. You may be morally free to choose the best option, but the laws are in place so that I as a taxpayer are not subsidizing your inheritance.

Even if my dad had outlived his LTC insurance I would NEVER have put my inheritance above keeping him in a place that was clean, pleasant and comfortable with quality care and assistance available to his need level. And he paid for his own mother's nursing home rather than have her in a medicaid institution.

Erchess,

I have first-hand experience with what Joanmcq is telling you here. She is right on the money. Most of these places are the epitome of your idea of a "snake pit". I have been there and have done that with my mother-in-law. As a result, she lived with us for 15 years in our home. Most of the time, it's not pleasant, but the right thing to do, when you put yourself in their shoes. You can only imagine what we have seen and at whatever costs to you, don't go down that other road.

I'm just sharing a personal experience and hope it's taken as such.

D

[Burke]

My experience with Medicaid and a house with a life estate on the deed, was that when the parent went into the state-paid nursing home and that was her only asset, Medicaid required a payment equal to the value of (her) life estate as calculated at that time. (It changes each year with his/her age.) House was sold, payment made to them, heir got the rest. Of course, if house is sold prior to Mom's death, heir(s) would have cap gains to pay on their part. One could take a mtge/equity line for the life estate amount, pay Medicaid their due, and sell the house after death. Then no cap gains to heir(s). Have an attorney intercede to explain life estate benefits to them and take yourself out of the picture, as he would have to draft and record the deed anyway.
As for exercising your "legal option," of course you have the right to Medicaid benefits if you qualify, but keep in mind it is we the taxpayers who are funding that option.

[erchess]

Reaction

Thank you to all who have written. I do know how bad Medicaid-approved homes are. If my parents are clearly capable of suffering they will not go to such a place if there is anything I can do, including sell the family home or anything else I own, that would stop it. However if they are comatose I would want competent medical authority to tell me whether they were capable of suffering and if not there would be no obvious reason for me to spend money on them beyond what I legally had to. Senility would be a different story because I think even a senile person would feel the pain of say a bedsore or diaper rash. I actually have historically had a harsh view of the senile and the mentally handicapped but as I get older that seems to be fading away.

Some might say that if I can I should keep the taxpayers from having to spend on them. I see that issue differently. I don't dictate the rules and just as I must live with those that perhaps take more tax money from me than I think fair, if I can legally pass an expense on to society I will without hesitation. I was born in 1959. which I believe makes me among the youngest baby boomers but my attitudes toward society and my role in it are more typical of Gen X or even Gen Y. I didn't make the rules and I feel morally free to seek the best the rules allow for myself and those closest to me and the rest of you had better look out for yourselves because I couldn't even if I wanted to.

On the other hand, I think I will advise my parents to let things ride the way they are. There is, in doing that, a risk that they will lie comatose in a home burning up a assets that both they and I would have preferred to see become mine but efforts to fend that off cost money, are not certain to work, and even if they did work I could end up realizing that I needed to convert the assets back to my parents' care.

[DTS]

...However if they are comatose I would want competent medical authority to tell me whether they were capable of suffering and if not there would be no obvious reason for me to spend money on them beyond what I legally had to.

Maybe, take a trip to one these facilities and see how they stick these unfortunate souls in the back, darkened corner of the facility. Heartbraking! Society does NOT and should NOT pay for this mistreatment of another human being, period.

Senility would be a different story because I think even a senile person would feel the pain of say a bedsore or diaper rash.

I'm probably not sure what you meant here.

Some might say that if I can I should keep the taxpayers from having to spend on them. I see that issue differently. I don't dictate the rules and just as I must live with those that perhaps take more tax money from me than I think fair, if I can legally pass an expense on to society I will without hesitation...I didn't make the rules and I feel morally free to seek the best the rules allow for myself and those closest to me and the rest of you had better look out for yourselves because I couldn't even if I wanted to..

I think a lot of us were raised by parents, in a time when they/we would rather swallow hot coals than rely on someone for a handout from the rest of society. This is not to say a little hand from time to time is not needed, but I think if I look at my own situation, I would rather use my own assets to pay for my own care, the way I want to be cared for, when the time comes. After my assets are totally used up, I may come knockin', but not until then. Same with my mother, I want her to use what she has to her advantage, not mine.

[gbroiles]

Medicaid transfer rules

Medicaid (Medi-Cal, here in California) rules are different from state to state, so you really need to find a local attorney who understands the transfer rules and strategies to get a real answer.

If your parents retain a life estate in the home but gift you the remainder interest, you will get a step up in basis upon their death because the home will be included in their estate for estate tax purposes because of section 2036(a).

In California, for example, a primary residence is considered an exempt asset, so there is no penalty for gifting the primary residence (or a remainder interest in the primary residence).

Also, not every Medicaid qualified facility is awful - there are some nice ones here in California - usually the private pay and Medi-Cal patients are mixed on the same floors and even in the same rooms. One strategy in CA is to have the family pay for the first 1 or 2 months privately, then switch to Medi-Cal; the elder stays in the same facility at the same level of care, since the facility can't discriminate on the basis of Medi-Cal eligibility/funding.

Anyway, my point is not to tell you that there is no problem, my point is that you shouldn't automatically give in to the doom-and-gloom scenarios that say that it's impossible to do pre-need planning or that Medicaid eligibility means that the elder will end up in the equivalent of Gitmo or the Hanoi Hilton.

The other angle on "should the taxpayers subsidize care?" is that the current system makes what seems to me an arbitrary distinction based upon the type of affliction one has - if an elder has cancer or heart disease, Medicare will pay for treatment. If an elder has dementia but is physically healthy, Medicare won't pay a dime, and the family must pay for institutional care once the elder cannot remain at home safely. I think it would be a lot more reasonable if elders either paid for their care, or not - but it shouldn't depend on whether you end up with an illness that attacks your heart or an illness that attacks your brain.