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Dear MarketWatch,
I have two elderly parents who own their home, but are still paying a mortgage on it. Both parents still live in it, but one requires a full-time caretaker. As far as bank accounts go, they are all set up with joint owners and beneficiaries.
We don’t know what to do about the house though. Should my sibling or I be buying it from them now? Can a house be deeded to us in a trust or a will or an estate even if there is still a mortgage owed on it? What if only one parent is mentally and physically able to sign paperwork for whichever direction is best? I would appreciate any help pointing in the right direction to move or to a resource that would help them/us. Thank you!
Sincerely,
Getting Old Myself and Still Don’t Know Everything
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
Dear Getting Old,
The situation your family faces is an important reminder to us all of the importance of handling estate planning proactively. It sounds as though your parents either never drafted a will, or drafted one that was insufficient. Otherwise, their will would have answered all of these questions already.
Before I address the housing-related questions you posed, I want to stress that you need to sort out the other estate-planning issues you raised. If your parent who has full-time care is not capable of making financial and other decisions, the healthy parent should seek to be named their guardian or conservator or to be granted power of attorney over their affairs.
The healthy parent should also look to identify an alternate person who would take over in their absence should they become incapacitated themselves or die before their partner. This will help to simplify the handling of the other paperwork at hand.
Homes with mortgages can be put in trusts
Onto the real-estate-related questions. The fact that your parents have a mortgage still even in their later years is not inherently a problem. It’s becoming more common these days, especially as many homeowners have taken advantage of low interest rates and refinanced their homes. Homes with mortgages can be put into trusts or left to heirs.
The only issue would be if they found themselves in a position where they could no longer make their monthly payments, in which case you and your sibling would need to step in to ensure the home doesn’t go into foreclosure.
“It’s fine to put your house into a revocable trust to avoid probate, even if that house is subject to a mortgage,” estate-planning attorney Liza Weiman Hanks writes. Indeed, homes in trusts can avoid the probate process — the trust simply will specify how the property should be divided upon your parents’ deaths. The trust could be revocable, meaning the property could be removed from it at any time, or irrevocable. And your parents can continue living in the home even after it’s placed in a trust. For these reasons, this is a popular strategy among homeowners who hope to leave their properties to their children.
“‘It’s fine to put your house into a revocable trust to avoid probate, even if that house is subject to a mortgage.’”
Sure, you could have your parents sell their home to you or your sibling, but it can be complicated from a tax perspective. If they sell the home for less than its value, then they will need to file a gift tax return with IRS for the difference between the sales price and the amount they sold it for. I don’t know how wealthy your parents are, but this could have real tax implications down the line if they exceed the lifetime gift tax exclusion.
If they were to sell it to you for the actual assessed amount, there could be capital gains considerations. There is an exclusion of up to $250,000 for the capital gains earned by selling one’s primary residence for single tax filers, or $500,000 for married couples filing jointly. Let’s say they bought the home for $100,000 in 1980, and it’s now worth $700,000. They would realize a gain of $600,000 in this case — so after the exclusion, they would owe taxes on $100,000 of the sale’s proceeds. (Note: this calculation doesn’t take into account any improvements made to the home or costs associated with selling it, which can be deducted from the amount earned from the sale to further reduce the amount of capital gains.)
Heirs, though, are entitled to a step-up in basis for property they inherit. That means that when calculating the capital gains for the sale of a home, instead of using the property’s price when your parents bought it, you would use the value on the day they died. So if the home is now worth $600,000, and you and your sibling inherited it and sold it the next day for that price, the capital gains would be zero. In other words, the proceeds from the home’s sale wouldn’t be taxed.
The long-term care question
Before you place the home in a trust though, your family should assess the cost of your parents’ ongoing health care. Long-term care is quite expensive, and if they haven’t already paid into a long-term care insurance plan, they may not have many options. Many older Americans must eventually rely on Medicaid to cover some or all of the costs of their care in their later years.
Medicaid won’t repossess your parents’ home if they’re living in it if or when this comes to pass, and homeowners can receive Medicaid assistance. But the agency can place a lien on the property to recoup its costs, which would need to be repaid when the home is sold. Because there’s also a mortgage at play, this could seriously reduce whatever proceeds you and your sibling would earn from the home’s eventual sale once you inherit it.
To avoid this situation, your parents could place their home in a specific Medicaid irrevocable trust, which, like a standard trust, would circumvent the probate process. According to Brooklyn-based attorney Roman Aminov, this means that “you also avoid Medicaid estate recovery, which is the government’s way of taking back the amount they paid for your care after you die.”
I’ve given you and your family a lot to consider. Conversations about the end of life are never easy, but now is the time to begin having them to ensure that no stone is left unturned in your parents’ estate planning. The sooner you settle these issues, the sooner you all can enjoy what time you have left together.
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