Q: There is an elderly lady that is a member of my church. She is living in an assisted living facility and is about to sell her home which will net her more than $100,000. The house is in her children’s names but at closing, they are going to write a check giving her back all the proceeds.
I’m wondering whether she or her children will pay taxes on the home? And how can she keep the assisted living facility from taking the cash away from her? How can she keep it secure and growing?
A: You didn’t include enough information in your letter for me to give you exact advice, but I’ll make a few assumptions and we’ll go from there.
First, when did the church lady give her children the property? If she gave it to them more than three years ago, it’s unlikely that any of the proceeds can be tapped by Medicare (assuming her assisted living facility bill isn’t being picked up by her children). If, however, it title to the property was recently transferred, and the state finds out, it could start proceedings to unwind the transaction. If that happened, all of the proceeds could be tapped.
That said, if her bank account suddenly has $70,000 in it, the assisted living facility may be able to drain it to pay her bills.
As far as taxes go, if the property is in the children’s names, they would pay taxes on the difference in between the price at which the church lady purchased the home and the sales price. Because she deeded the house to her children as opposed to leaving it to them in her will, they did not receive a stepped-up basis for the property. If she had willed the property to her children, and it was worth $100,000 on the day she died, and they turned around and sold it immediately, there might have been no taxes to pay at all.
Unless the children still live in their mother’s house, it will be considered an investment for them. If they have owned it for more than a year, then they would owe long-term capital gains, which might be as much as 15 percent of the profits. If they have owned it just for a few months, then they’d pay tax at their regular tax rate, which depends on how much they earn each year.
Your friend and her children should talk to an accountant or estate attorney who can make sure the legal stuff is done right. As for investing this cash for her future, she needs to sit down with a terrific financial planner who, depending on her health and actual age, can make the appropriate investment recommendations.
July 2, 2004.