Sometimes we take steps to protect our assets, but they have unintended consequences. Learn how to avoid the most common financial mistakes to protect finances and what to do instead to enjoy your hard-earned savings.
1. Do Not Add a Person to Your Bank Account
Many aging adults add an adult child’s name to their bank accounts so their child can pay their bills if ever sick or incapacitated. However, adding someone to a bank account inflates the assets available to that person with many unintended consequences. Not only does the money in your account become exposed to other liabilities, but in the event of divorce or a legal judgment, your money may go to a future ex-spouse or be used to pay your child’s debts, even against your wishes. Adding a child to a bank account also means those funds appear available to your child’s family, which could eliminate eligibility for scholarships or financial aid or other public assistance.
Although adding a person to your bank account allows someone else access to your money if you need help, you relinquish full control of your account and make your assets equally available to your child. The better solution? Meet with an elder law attorney and execute a financial power of attorney tailored to your wishes. That way, you grant your child authority to act on your behalf without giving away full access to your account.
2. Do Not Add a Person to Your Deed
Similarly, some people add another person’s name to the deed for their home as a way of protecting the house from potential long-term care costs. Adding someone to your deed introduces the same risks that come with adding someone to your bank account and exposes your home as an available asset in the event of bankruptcy, divorce, or judgment. In addition, adding a child as owner of your home also creates a potentially significant tax bill for your child and adds unnecessary risk to you.
When adding someone to your deed during your lifetime, that person inherits your basis for tax purposes — meaning whenever the person sells the home, the capital gain is measured from your initial investment. When a child inherits a parent’s property at death, however, the basis or what is considered the child’s initial investments resets to present-day value. Then any capital gain on sale measures from the date of death instead of the date you purchased the property. The result can be a difference of tens of thousands of dollars in owed taxes!
Adding a name to your deed could also prevent you from receiving valuable benefits for long-term care when you would otherwise be eligible under Medicaid rules. The transfer of property to someone else — even if you retain an interest — incurs a penalty period based on the value of your home at the time of transfer. The better solution? Meet with an elder law attorney who knows the transfer rules in your state to ensure protection of your home without passing a hefty tax bill on to your children.
3. Take Time to Plan for Long-Term Care Needs
We tend to procrastinate or avoid long-term care planning due to unpleasant associations with illness and death. Yet a full 70% of all older adults will need some long-term care as they age. Even if you are healthy today, odds are that you will require long-term care at some point — and the costs of that care are staggering.
Some long-term care insurance policies cover portions of those costs, but usually for a limited time at a limited rate and in limited circumstances. Many seniors mistakenly assume Medicare will cover residence in a nursing facility, then make a second mistake when discovering Medicare does not cover skilled nursing and unnecessarily spend all their hard-earned resources on the care they need.
The better solution? Protect your assets and receive quality long-term care when you need it with proper planning. But you need to act while healthy to maximize protection. The time and investment in working with an elder law attorney is a fraction of the cost and emotional investment of finding and paying for care without a plan in place.
By Michelle Tupper Butler
Michelle Tupper Butler is a practicing elder law and estate planning attorney who founded Tupper Butler Law PLLC following a medical crisis that led to her caring for her father.
P.S. Check out these 10 questions to ask your parents.