Dear Fix My Portfolio,
We’re coming to you with heart in hand because we’re in a quickly worsening situation.
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Our mother just turned 80, and in the last year and a half she has developed severe, rapid-onset dementia. She’s going fast. The same thing happened to a friend’s father, and he died within two years or so, when his brain stopped sending signals to his heart.
We worked hard to leave her secure in widowhood. We repaired her home, paid off her new car and organized all her accounts. She even went to the gym three days a week, so she was very physically healthy. However, we did not prepare for this possibility. Both her parents were almost 90 when they died and were in good cognitive health.
She has a $400,000 paid-off home, $500,000 in savings and $600,000 in stocks. We three siblings have agreed to split everything three ways: We are the beneficiaries on all her accounts and will inherit her home. We all live in Texas, and my brother has power of attorney.
She’s in a rapidly increasing downward spiral. How do we care for her and pay the least amount in taxes?
Trio of Siblings
Dear Trio,
I’m sorry you’re facing such a hard road ahead with your mom. There’s a lot of uncertainty, and I’m sure it’s very scary. It’s particularly hard to predict the trajectory of an illness like dementia. What seems like a fast downward spiral now can stabilize to a new normal. The human body works in mysterious ways.
You three siblings need to circle the wagons and prepare for a long winter in order to safeguard your mother’s resources for her care. You have a lot going for you in that her house is paid off and she has a significant amount of savings. Care is expensive, though, and families can’t always handle cognitive-impairment illnesses at home or without paid caregivers.
First off, make sure that everyone is on the same page. If your mother is still able to participate in these conversations, it’s important to have her involved, too. “It can be difficult to talk about money with anyone, and very difficult with family. But one of the first steps … is opening up a line of communication,” says certified financial planner Jim Trujillo, a principal at Cerity Partners who is based in Louisville, Ky.
When you lay all the financial cards on the table, you’ll be able to see her monthly income and spending and get a sense of how much of her savings she needs to burn through each month. This number will be changing all the time as her care needs develop. You may also have some large expenditures to think about up front, such as modifying her house or making a down payment on a care facility. If you take out big chunks of principal at the start of this process, it’s going to have a domino effect in terms of growth and what funds are available down the line.
Your immediate tax burden — which is really her tax burden — will depend on what order you spend down her assets. You don’t specify the types of accounts where her money is held. It makes a big difference, taxwise, whether her cash and stocks are in tax-deferred accounts or in taxable accounts.
You also don’t specify if she has any current income from pensions or Social Security. I’ll assume, given that you don’t mention it, that she has a small amount of Social Security income.
Required minimum distributions on $1.1 million
If most of her savings are in a tax-deferred IRA, she would take out either her required minimum distribution or whatever amount greater than that she needs to live on annually, and pay income tax as she withdraws. The RMD for an 80-year-old with $1.1 million is roughly $55,000 in 2024, according to an estimate from AARP’s online calculator.
If she withdraws more than $34,000 this year, that will push her into paying tax on 85% of her Social Security benefit. If her modified adjusted annual gross income is over $103,000, she may face IRMAA surcharges on her Medicare payments, which will come out of her Social Security checks and may cause her to need to withdraw more each year.
This also matters when it comes to inheritance. If you three inherit any funds in an IRA, you’ll split the amount and each have to pay tax as you withdraw the funds. You have up to 10 years to transfer the money to a taxable account, and you will likely be subject to required minimum distributions each of those years.
If all her money is in taxable accounts, she would only have to pay tax on the growth in those accounts for the year. The tax due from the stocks would depend on what she earns in dividends, assuming there are any capital gains. On $500,000 cash at 5%, that could add $25,000 to her income for the year. (A side note: If she’s not currently earning 5% on that cash, it’s time to move her money to get her some benefit from current high interest rates.)
If you inherit funds left in taxable accounts, you’ll split the cash, and the stocks will get a step-up in basis. Just make sure your mom has named you each properly as beneficiaries. If she hasn’t, you’ll need to go to probate.
If any of her money is in a Roth IRA, she would not owe any tax on it. Neither would any of you, if there’s money left to inherit.
Bigger decisions lie ahead
Caring for your mom could get very expensive. You three will have to decide what she needs and how to best provide it, and you’ll keep making those decisions over time as things change. Will one of her children move in with her for now? Are you going to move her into one of your homes? Is she going to go to a memory-care facility? Will you hire caregivers to help?
Home care, assisted living and nursing care could all cost around the same amount — $5,000 a month in Texas, according to the latest Genworth Cost of Care survey. That’s $60,000 a year at least. Your mileage on this may vary. Some memory-care situations cost more like $12,000 a month. The brother with power of attorney is the final arbiter of the decisions about how to pay for all of this, but the course of your mom’s medical treatment is up to the person or persons she named as her medical representative in a living will, if she’s not able to make those decisions currently. This is why communication is so important.
If you do move your mom out of her house, you’ll have to decide what to do with it. If you sell it while she is still alive, the taxation will be based on her basis in the house. As a single person, she only has a $250,000 exemption from capital gains, so any profit above that amount may be taxable to her. If you leave it in her name until she dies, the house would pass to the three of you at the fair market value on her date of death. Then you could probably sell it and split the proceeds without owing any tax. Things will get complicated, though, if you wait to sell it or if one of you wants to hold on to the house and buy the others out.
Another possible complication relates to how the house will pass to you. Texas has “lady bird” deeds, which allow you to name beneficiaries on a home deed, like you would on life insurance or an investment account. This allows the house to pass to the heirs without having to go through probate or without a trust being needed. If this is the case with your mom’s house, then you would have an easier time of it after she passes.
If you mean instead that the three of you are co-owners already on the deed, that’s a much more complicated financial situation. In that case, you may each owe capital gains on any future sale of the property, because you do not get a step-up basis to fair market value upon death.
Another point to clarify is what you mean when you say: “We three siblings have agreed to split everything three ways.” Legally, your mom’s directives come first. If she only named one of you as a beneficiary on her stock brokerage, for instance, that sibling would inherit those funds. If you have all agreed to split everything three ways regardless, that’s a great family spirit. Just know it’s on you to make that happen.
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