Hello everyone,
My mother-in-law approached my wife and I to discuss estate planning. Specifically, she expressed an interest in transferring her primary residence to us in the event that she requires Medicaid in the future. The topic is important to her because she had to navigate Medicaid when her husband (now deceased) became ill and went to a nursing home about 6 years ago. She is currently 71 and in very good health.
Her intention is to live in the property until she is no longer able to do so (i.e. if her health fails). If she no longer lives in the property, we will likely keep the property as a rental and use any profits, plus other assets we have, to provide her with financial support for costs that are not covered by Medicaid.
I've made a variety of assumptions here and included my math. Based on my analysis, it looks like more assets would be retained by transferring the property rather than keeping it in my mother-in-law's name.
- Property Stays in Mother-in-Laws Name = $246K Assets Retained
- Property is Transferred = $338.4K Assets Retained
I'd appreciate your thoughts on anything that you think I may not be considering and, of course, please feel free to challenge my analysis.
Thanks for your time
Mother-in-law Assets
- $25K IRA
- $275K primary residence (no mortgage)
Assumptions for this Analysis
- Mother-in-law is in good health and will live for approximately 12 years (+2.5 years above average). Average life expectancy is 80.5 based on age, etc.
- Real estate will appreciate at approximately 3% per year in our area
- Medical inflation will be approximately 4% per year in our area
- Inheritance tax will stay at 4.5% in PA
- Long term capital gains will stay at 20% (estate attorney said about 20%, so this might be a group of taxes bundled in one)
- 48.0% of people turning age 65 who will need some type of paid long-term-care services in their lifetimes according to Health and Human Services
- 24.0% of people turning age 65 who will require paid long-term care for more than two years according to Health and Human Services
- Average duration of care in nursing home for a woman is 3.6 years according to Health and Human Services
- Average cost of a skilled nursing facility in our area is about $12,000 monthly / $144,000 annually
- Average cost of at-home nursing care in our area is about $5,800 monthly / $69,600 annually
- Since it is unclear what type of support may be needed, the cost of skill nursing and home care will be averaged. (144K + 69.6K)/2 = $106,800 annual cost.
- Planning to use Expected Monetary Value (EMV) formula: EMV = Probability x Impact
- To calculate impact, will use 24% probability of care and average duration of 3.6 years to quantify cost
- We currently pay the property's taxes and maintenance. We would continue to pay these expenses whether or not the property is transferred.
Estimated Costs/Value when Care is Needed
- Mother-in-law, using assumptions, will live to 83
- Care starts at 83 - 3.6 = 79.4 years old
- For inflation calculations, 79.4 years old - 71 current age = 8.4 years before care is required
- Value of Home in 8.4 years when care begins = 275K x (1.03)^8.4 = $352,505
- Cost of Care in 8.4 years = 106.8K x (1.04)^8.4 = $148,474 per year x 3.6 average duration of care = $534,507
- Value of Home in 12 years when mother-in-law passes = 275K x (1.03)^12 = $392,084
Property Stays in Mother-in-Laws Name
Inheritance tax will be $392K x 4.5% = $17,643. This is based on her living to the age of 83 (12 years from now).
Using EMV formula, EMV = 24% Probability of Care x $534,507 Cost of Care = $128,281
Home Value $392K - $128,281 Cost of Care - Inheritance Tax $17,643 = $246K Assets Retained
Property is Transferred
- Cost-basis when property purchased = $60,000
- Improvements to home = $30,000
- Step up in-basis when mother-in-law's spouse died = $30,000. In PA, when a spouse dies, there is a half step up in value.
Calculation $150,000 value when husband died - $60,000 purchase price - $30,000 improvements = $60,000 basis increase
$60,000 / 2 = $30,000 half basis increase
- Assume further $10,000 in improvements to home over next 10 years. This is low, but it is difficult to determine the correct figure here.
- Cost-basis of property at mother-in-law's death = 60,000 property purchase + $40,000 improvements + $30,000 step-up at husband's death = $130,000
- Capital gains tax will not be paid until property is sold. We have no intention on selling during the next 20 years, but the only cost figure that we would need to consider is the additional cost that we would pay, eventually, based on performing the transfer.
- Capital gains tax (not realized) at mother-in-law's death = (Property value $392K - 130K Cost-basis) x 20% = $52.4K
- Cost to transfer property (1% state tax waived on transfers to children). Cost of filing fees = approximately $1,200
Home Value $392K - Capital gains tax $52.4K - Filing fees $1.2K = $338.4K Assets Retained
My mother-in-law approached my wife and I to discuss estate planning. Specifically, she expressed an interest in transferring her primary residence to us in the event that she requires Medicaid in the future. The topic is important to her because she had to navigate Medicaid when her husband (now deceased) became ill and went to a nursing home about 6 years ago. She is currently 71 and in very good health.
Her intention is to live in the property until she is no longer able to do so (i.e. if her health fails). If she no longer lives in the property, we will likely keep the property as a rental and use any profits, plus other assets we have, to provide her with financial support for costs that are not covered by Medicaid.
I've made a variety of assumptions here and included my math. Based on my analysis, it looks like more assets would be retained by transferring the property rather than keeping it in my mother-in-law's name.
- Property Stays in Mother-in-Laws Name = $246K Assets Retained
- Property is Transferred = $338.4K Assets Retained
I'd appreciate your thoughts on anything that you think I may not be considering and, of course, please feel free to challenge my analysis.
Thanks for your time
Mother-in-law Assets
- $25K IRA
- $275K primary residence (no mortgage)
Assumptions for this Analysis
- Mother-in-law is in good health and will live for approximately 12 years (+2.5 years above average). Average life expectancy is 80.5 based on age, etc.
- Real estate will appreciate at approximately 3% per year in our area
- Medical inflation will be approximately 4% per year in our area
- Inheritance tax will stay at 4.5% in PA
- Long term capital gains will stay at 20% (estate attorney said about 20%, so this might be a group of taxes bundled in one)
- 48.0% of people turning age 65 who will need some type of paid long-term-care services in their lifetimes according to Health and Human Services
- 24.0% of people turning age 65 who will require paid long-term care for more than two years according to Health and Human Services
- Average duration of care in nursing home for a woman is 3.6 years according to Health and Human Services
- Average cost of a skilled nursing facility in our area is about $12,000 monthly / $144,000 annually
- Average cost of at-home nursing care in our area is about $5,800 monthly / $69,600 annually
- Since it is unclear what type of support may be needed, the cost of skill nursing and home care will be averaged. (144K + 69.6K)/2 = $106,800 annual cost.
- Planning to use Expected Monetary Value (EMV) formula: EMV = Probability x Impact
- To calculate impact, will use 24% probability of care and average duration of 3.6 years to quantify cost
- We currently pay the property's taxes and maintenance. We would continue to pay these expenses whether or not the property is transferred.
Estimated Costs/Value when Care is Needed
- Mother-in-law, using assumptions, will live to 83
- Care starts at 83 - 3.6 = 79.4 years old
- For inflation calculations, 79.4 years old - 71 current age = 8.4 years before care is required
- Value of Home in 8.4 years when care begins = 275K x (1.03)^8.4 = $352,505
- Cost of Care in 8.4 years = 106.8K x (1.04)^8.4 = $148,474 per year x 3.6 average duration of care = $534,507
- Value of Home in 12 years when mother-in-law passes = 275K x (1.03)^12 = $392,084
Property Stays in Mother-in-Laws Name
Inheritance tax will be $392K x 4.5% = $17,643. This is based on her living to the age of 83 (12 years from now).
Using EMV formula, EMV = 24% Probability of Care x $534,507 Cost of Care = $128,281
Home Value $392K - $128,281 Cost of Care - Inheritance Tax $17,643 = $246K Assets Retained
Property is Transferred
- Cost-basis when property purchased = $60,000
- Improvements to home = $30,000
- Step up in-basis when mother-in-law's spouse died = $30,000. In PA, when a spouse dies, there is a half step up in value.
Calculation $150,000 value when husband died - $60,000 purchase price - $30,000 improvements = $60,000 basis increase
$60,000 / 2 = $30,000 half basis increase
- Assume further $10,000 in improvements to home over next 10 years. This is low, but it is difficult to determine the correct figure here.
- Cost-basis of property at mother-in-law's death = 60,000 property purchase + $40,000 improvements + $30,000 step-up at husband's death = $130,000
- Capital gains tax will not be paid until property is sold. We have no intention on selling during the next 20 years, but the only cost figure that we would need to consider is the additional cost that we would pay, eventually, based on performing the transfer.
- Capital gains tax (not realized) at mother-in-law's death = (Property value $392K - 130K Cost-basis) x 20% = $52.4K
- Cost to transfer property (1% state tax waived on transfers to children). Cost of filing fees = approximately $1,200
Home Value $392K - Capital gains tax $52.4K - Filing fees $1.2K = $338.4K Assets Retained
Statistics: Posted by Zeus — Sun Nov 24, 2024 1:06 am — Replies 3 — Views 223