Importance of Personal Residence in Tax and Financial Planning for the Elderly Client

For most elderly clients, their home, even after the recent housing turmoil, is one of their most significant financial assets and, therefore, is a key component in any estate, financial, and related planning. The house also provides the shelter for the family and thus is an integral, and often emotional, asset for which to plan. For many elder clients, maintaining the home becomes a symbol of pride, independence and vitality. Thus, planning may be centered on maintaining a home long after it is financially or physically appropriate. There is a growing trend of seniors to remain in their homes instead of moving to a senior facility or downsizing. This is sometimes referred to as “aging in place”. As this trend grows, modifications to existing homes will become more common. Financing the improvements, maximizing the tax benefits of such improvements, and related planning, will become more important. The provisions contained in powers of attorney, revocable trusts and other estate planning documents may have to be modified to reflect the client’s wishes in this regard (e.g., perhaps prohibiting the typical broad right to sell a residence included in most durable powers of attorney). State and local programs to encourage or assist seniors to stay in their homes may be important to consider. Although houses are nearly ubiquitous in planning for clients, including the elderly, the tax laws that affect them are extremely complex, and can have a dramatic impact on the net worth of the family. This complexity has been complicated by a host of tax changes affecting home ownership, as the government has endeavored to shore up housing values and secure home ownership in light of the sub-prime crises. The complexity and change will likely be compounded in future tax legislation, which, at the time of this writing, President Obama will propose. For example, capital gains rates, especially for wealthier taxpayers will likely increase. The American Recovery and Reinvestment Act of 2009 included a host of provisions that affect planning for a home, including a residential property credit and residential energy efficient credit. Tax breaks for moderate and low income home owners will be enacted. Therefore, be certain to check the status of recent income tax changes and other programs affecting home ownership before finalizing any planning recommendation. Another caution is in order. The decisions that are optimal for income tax purposes often differ from the optimal decisions for estate planning, elder law planning, or other purposes. Practitioners must therefore understand the general rules affecting the most common transactions in which elderly engage with respect to their houses. This chapter, however, will not address elder law and Medicaid issues. Even though the focus of this chapter is the tax considerations affecting planning for an elderly client’s home, a host of facts should be ascertained prior to addressing tax issues. Comprehensive planning for the elderly client’s residence is critical, since a mere focus on tax minimization may leave the client in an untenable position. Some of these factors are:

• Age of client.
• Health of client and prognosis for future mental health status. For example, 50% of those over age 85 have some degree of dementia. What is the client’s current mental health status? What is the prognosis? What can be done to protect the client in his or her home if dementia occurs or worsens?
• Location of the home relative to medical providers, needed resources (e.g., shopping), family, etc.
• Who is available to help the client as he or she ages, and how might the client’s continuing to reside in the home improve or hinder this assistance?
• What is the client’s social status, and how will continuing to reside in the home affect this?
• What is the client’s physical condition and likely future prognosis? How might residing in the home affect this status? What steps can be taken to modify the home (e.g. ramps, elevators, etc.), and at what cost, to enable the client to continue to reside in the home? Will government or other programs fund these costs?
• If the client has a significant illness or becomes incapacitated would he or she wish to return to reside in the residence? Have durable powers of attorney, living trusts, and other documentation been tailored to reflect these objectives?
• Have the investment provisions of the client’s estate planning documents, and those of the client’s spouse, been modified to conform to the client’s wishes as to retaining a residential property (primary residence or vacation/second home)? If not, will the fiduciary be obligated to liquidate and sell the residence when the client may not wish it? Have these fiduciaries been granted adequate authority, and available resources, to fund the maintenance of any residences?
• Have Residential Care Facilities for the Elderly (RCFEs), such as Assisted Living Facilities, Board and Care Homes, or Retirement Homes, Continuing Care Retirement Communities (CCRCs) and other residential options for the elderly client been considered? While these are not addressed in this chapter, a complete evaluation of housing options for the client is really a prerequisite to determining tax consequences of options for the client’s home.
• What are the expectations of family members and heirs as to the home?
• How strong of a sentimental attachment does the client have to the home?
• What is the physical status of the house itself (is it sorely in need of repairs? Major or minor?).
• Are any governmental programs available that will reduce the cost of the elderly client staying in his or her home? These might include property tax abatements for the elderly, etc.
• Any other relevant facts and circumstances.

The house is one of the largest and most important assets of a senior client. Unfortunately, the tax and financial issues that affect this common asset are quite complex, and even minor deviations from applicable rules can result in substantial tax costs. This chapter has outlined in general terms some of these issues. For practitioners who are not tax specialists, the discussions in this chapter should enable the practitioner to work more closely with the client’s accountant or tax counsel to ensure that the appropriate planning is implemented.