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Parents are almost 80 and need assistance. What should they do with their house proceeds so that they don’t lose all of it later to taxes and Medicaid should they need a nursing home? Can they gift us money towards our mortgage since we are all living together? Will this cause a problem under the 5 year rule?

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Use it to pay for Assisted Living or Independent Living.
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They can’t gift you any money if they will need Medicaid in the next 5 years and honestly going on Medicaid should not be their goal if they have money. What they can do is use the money to live off of and that includes paying you room & board and contributing the household expense.
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Call your tax accountant. Capital gains taxes are a non issue, as a rule, unless there is more than $500k in profit to be realized from the sale of the primary home for 55 year olds and over. They should contribute to your household expenses if living with you, and you should save receipts and seek legal advice for amounts that would be fair.

Medicaid does a 5 year look back to make sure your mortgage isn't being paid off so your parents can get free long term care sooner. The government frowns on things like that, and so do us taxpayers.

The goal should be getting your parents the highest level of care possible with the sweat equity they've earned. That's the purpose of it. Medicaid is a last resort after all of their savings have honestly been used up, not squirreled away for "inheritances".
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For their care and living expenses only. But, however that is worked out, it must be a formal contract. Get the assistance of an elder law attorney that will draft one that's on compliance with state law.

No, you cannot pay down your mortgage then have taxpayers foot the bill for their care when they need it.
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They should pay their fair share but, how do you figure that they are losing their money if it go towards their care?

That's what the money is for, their care. So do the right thing and don't try to commit fraud by hiding it.
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In my opinion, I think the money from the sale would be better used for Independent or Assisted living. You love and care about your parents. But after awhile, people feel the need for their own space. You and hubby, and your parents should have your own space.
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They will be two additional people in your home and of course the household expenses will increase.

They should be paying for legitimate living expenses.

Speak to an elder attorney if you want professional advice about how to budget and spend their money for their needs.
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More or lessing repeating what has already been said: their money is to be used for their care and housing. Keep records, receipts.
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there is a right way and a wrong way to do most things. It matters. Seek the advice of a certified legal attorney. Get over any altruistic idea of not being paid rent or for your time. You have given up your life in order to prop their lives up. No disrespect meant. Just the hard truth.
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Sounds like yall need the advice of a certified eldercare attorney. Have you and your husband really talked and understand all your privacy will be gone,
i would look into IL/AL for them. The proceeds from the sale of their home would be used to fund their care, not anything else.
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