‘Have we made a terrible mistake?’ My brother put our names on the deed to our 88-year-old mother’s home. What should we do?

The home is paid for in full, and she purchased it around 1995. Our mother is a very healthy 88-year-old, so she has no foreseeable issues going into a nursing home. We don’t want to jeopardize her Medicare or Medicaid. Have we made a terrible mistake?

Concerned Son

Dear Son,

If you and your brother are on the deed of your mother’s house when she dies, you will likely be responsible for capital gains tax on the house after your mother dies and when you go to sell. It would mean you will not avail of a “step-up in-basis” on capital gains taxes. 

With a step-up in-basis, the profit on any sale would be calculated as the sale price minus the recent appraised/market price of the home — not the purchase price. In other words, the tax is based on the property’s fair market value when their benefactor died.

Here’s an example: If the house was bought for $500,000 and worth $1 million, you would pay capital gains on the difference between $1 million and the sale price — and not on the original price paid for the property by your parents.

Obviously, consult a trusts and estates attorney before making any further decisions. A qualified attorney can help you make sense of how complicated calculating a basis can get, such as if there were improvements made prior to the addition of your names on the deed, or if adding your names was considered a gift. You have one thing in your favor: in these circumstances, elderly parents are sometimes cajoled to sign over their home, and risk being evicted when they do so. That is not the situation here.

There are other ways adult children can set up the transfer of a parent’s home. A transfer-on-death deed would also be cheaper than setting up a trust, which can be expensive and complicated, and would supersede any previous lost-and-found will made by your parents. 

Medicaid eligibility

Medicare is a federal program that provides health coverage if you are 65 and over. Medicaid, on the other hand, provides health coverage for those who have a very low income. Medicare does not cover long-term care costs such as a nursing home.

Some people think that they should sell their elderly parent’s home, but this should not be done without legal advice. Selling a home can disqualify an individual from Medicaid, due to the parent in question having excess assets.

What’s more, most states have a five-year look-back period on maneuvers people make with their finances for such purposes. So it’s difficult to “game the system” to ensure a parent does not have too many assets.

As such, there would need to be a five-year grace period in most states between setting up such a trust and filing for Medicaid coverage, if you were to put your mother’s assets in a trust. But it would all depend on the rules and limits in your particular state.

In 49 U.S. states and Washington, D.C., the look-back period is 60 months; in California, it’s 30 months. Even if a Medicaid beneficiary has a windfall or an inheritance, and gives the money away, they are in violation of the look-back rule, the American Council on Aging says.

Think twice before making such big decisions, and always seek out legal counsel.

Readers write to me with all sorts of dilemmas. 

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