Question: I recently read an article about you in Kiplinger’s which quoted you, saw your website address, and wanted to ask you about our situation. Because no family lived near them should there be problems later, my parents, now 77 and 79, sold their home last year and moved in with my wife and I until they could get situated. They looked at condominiums and independent living facilities, but the cost was out of sight. Since two of our children are still at home and our house does not comfortably accommodate all of us, it was decided that my wife and I would add an apartment area for my parents and they would help with the cost which tuned out to be $100,000. My parents do not own any part of the property which belongs to my wife and I.

In addition, my parents share our monthly living expenses by paying part of the utilities, groceries, etc. Now we have concern about what will happen if either of my parents needs care. They only have $35,000 in the bank, and their total income from Social Security is $1,000.00 per month. My wife and I have protected them in our wills by making sure that if we die, they will have a place to live until their deaths. However, if either needs nursing home care down the road and applies for Medicaid, how will their contribution to the cost of their apartment affect them? I understand that the government looks at the last three years of their financial transactions, and we assume that they will not be able to apply for three years. Also, are there limits on what they can give us to help pay for utility bills, food, etc. We are also concerned about any gift taxes. They are both in good health now, but learning from other peoples’ experiences, you can never be too prepared. We would really appreciate any advise on this.

Answer: Since your parents made a gift to you and your wife of $100,000, even though there is no gift tax due, they are required to file a gift tax return by April 15 of this year. However, the gift could impact a future application for Medicaid by either of your parents if made during the disqualification period which is not necessarily three years. A popular misconception is that if a gift is made today, there will be an automatic three year disqualification. This is not the case.

Here’s how to determine the period of disqualification: Each state determines the average monthly private pay cost of a nursing facility on an annual basis, so let’s assume that the average rate in your state is $3,000. By dividing the amount of the gift ($100,000) by the average private pay rate ($3,000), your parents’ period of disqualification would be 33.33 months. This means that based on current law, if either of your parents applies for Medicaid in the 34th month after the gift was made, there will be no disqualification -- assuming they meet the other criteria.

When it comes to your parents sharing living expenses with you, there are several issues that should be considered. First, you and your wife certainly don’t want these payments to be considered as “rent” which would be income to you and which could affect your tax basis in your home. For this reason alone, you and your parents should enter into an expense-sharing arrangement, in writing, by which on-going monthly obligations are divided on a fair, pro-rata basis.

Taking the NextStep: Today, more and more parents are moving in with children. Creative planning is essential before the fact. Visit www.nextsteps.net and sign up for our complimentary e-newsletter about matters affecting elderly persons and their families.