One of the biggest issues seniors face as they get older is how to preserve an inheritance for their children. Their biggest fear is spending all of that money on assisted living and/or nursing home care. As each family situation is different, so is each solution. Perhaps you can learn something from the experience of one of my clients.



Here's their situation in their own words, with their names changed, of course:

"Tom's mom has decided that she wants to move to a retirement home while she can make her own decisions about where and when to go. She's on the waiting list at one that's so nice I may go too!"

"Anyway, we are looking at options of what to do with her house. She's always wanted the house to go to Tom and his brother Les even if she has to use up every other asset she has."

"Les is disabled and on Social Security Disability Income. Mom sends Les about $150.00 a month to help out. Her first thought was to sell the house and divide the proceeds now. Tom thought it might be better for her to lease it and then she could still send Les money each month."

"Also, if she were to sell, we think she should keep the money in case she ends up needing it to live on. I know there are tax limits on gifts of money, (and not sure what all that would do to Les's assistance eligibility). Maybe she could sell, give each $10,000 and keep the rest for her future living expenses. Anyway, I think she could well be heading toward some mental issues (lots of forgetfulness, etc.) so we need to make the right decision."

"What say you, Mr. Financial Guy?"

These are difficult situations. First, you need to make sure that you have the appropriate legal documents in place to handle any incapacity that may/may not occur. There should be Powers of Attorney for Assets and Healthcare and/or a Living Trust. There should be a Living Will. If she doesn't have a Living Trust you will want to make sure that her Will is up to date.

There are issues relating to Les receiving an inheritance in that it might disqualify him from SSDI. It's important that any inheritance he receives go to a Special Needs Trust. Otherwise, the government might take the money as pay back for what they've spent. Be sure and consult a qualified attorney for this kind of trust.

Depending on her income, she may need the money to cover her assisted living and/or future nursing home care. Some want to leave an inheritance and try to get the government to pay for their care. That is done through Medicaid. To qualify, one has to be indigent--having less than $2k in assets.

So if she sells the home and uses the money for her care, she will need to spend it down to $2k before qualifying for Medicaid. There is a 5-year look back period when someone applies for Medicaid. If they have gifted money within that period, they will be denied benefits for the amount of time that money would have otherwise covered.

There are really two unknowns here. First, whether mom will need all her money for her care and, second, whether that will occur within 5 years. If she sells the house, she can gift all the money to her sons now without having to worry about Federal Gift Taxes (other than filing a form). She should check to see if there will be any state gift taxes.

As long as her other money lasts for 5 years the gift wouldn't impact future Medicaid eligibility. Another option is for her to consider long term care insurance. She has to medically qualify and her memory issues may keep that from happening.

In short, Mom should make sure she has enough money to cover her expenses for the next five years. She might need some of the house proceeds to cover this. Then she could go ahead and gift the remaining house proceeds to her sons. If she qualifies, long term care insurance could help cover future health care expenses. And you're right to not put off these kinds of difficult decisions. Deal with it now, before it's too late.