Financial Answers Are Not A Snap Decision
We Americans are smitten by the fast answer and the quick fix. What else would explain the success of books such as “The One Minute Manager” and “The One Minute Millionaire,” and phenomena like speed reading and Dr. Phil?
When it comes to finances we like to believe that there is an easy answer not dependent on specific circumstances that we can reference that will always be true. “One size fits all,” in finances as in fashion, rarely fits anyone well. The difference is that making snap financial decisions without exploring the background can have more lasting consequences than a bad hair day.
Recognizing this, I read a response to a short question posed to a financial columnist recently. The person who raised the issue had elder issues of her own.
Here is the question.
Where a Granddaughter has an elderly live-in Grandmother who left everything to Granddaughter in her Will, would it make sense to have Grandmother sign the house over to Granddaughter now.
The advisor responded by discussing gift taxes and ease of transfer during life and suggested that, as long as Grandmother was competent, the transaction should be relatively easy. As an elder law attorney, I watch and shudder as similar advice is given every day. Gift tax should really not be a primary concern and an attorney specializing in elder law would likely question the Granddaughter in much greater detail about their circumstances recognizing the possible consequences. Here is why.
Why gift tax is not the primary concern in most cases when an older relative plans on transferring the house. If Grandmother gives more than $13,000 in cash or assets this year to one person, an amount referred to as the annual exclusionary amount, a gift tax return should be filed. However, unless Grandmother has given substantial gifts in her lifetime, no tax would be owed.
Gift tax returns are the government’s way of keeping track of lifetime gifts. A tax would be owed if Grandmother gave over a million dollars in cash or assets above the annual exclusionary amount in her lifetime. This circumstance affects relatively few people.
The question should be what happens if Grandmother needs long term care. Transfers can affect long term care. While Granddaughter might believe that she has all the resources at home she needs to care for Grandmother until her death, the fact is that, with Grandmother approaching age 90, it is very possible she may eventually need long term care. Both nursing home Medicaid and the at-home Medicaid waiver program require a review of gifts that were made for years before benefits are requested. Many families have heard of the “3 year lookback” and the “5 year lookback.” February 8, 2006 marks the change in the law and any gifts given after that date need to be carefully examined since gifts can result in a denial of benefits through a penalty period.
Isn’t there a Caretaker Child exemption for someone who lives in the house? Anyone who has read my columns for some time may recognize a “Caretaker Child” exemption that could apply to protect an adult child who has lived with a parent in the parent’s home for at least two years and assists so that the parent does not need to go to a nursing home. There, if the rules are followed exactly, a house may be transferred into the name of the child without affecting later benefits. The exemption does not apply to a grandchild or any person other than a child at this time.
Couldn’t Granddaughter just take the house and return it to Grandmother if Grandmother later needs long term care? Maybe but there could be problems. If the house was worth more at the time of transfer and less at the time it is transferred back, there could be a shortfall.
A transfer back may also need to follow specific rules as to timing. Also, if the house is sold and the money is spent, or if Granddaughter goes through a financial crisis, Granddaughter may not have the funds to pay through the penalty period.
Can’t the house be put in a trust? Putting the house in a revocable living trust has no positive benefit. Irrevocable trusts have five year lookbacks.
Are there other considerations? Sure. An elder law attorney would also discuss capital gains taxes and, in Pennsylvania, inheritance taxes. Grandmother needs the security of knowing that she will have a place to stay. There may also be ways to compensate Granddaughter for her services through a Family Agreement.
There is no one answer in every case. Every family has its own thumbprint.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.