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Financing Your Aging Parents

Do you have an aging parent who is facing the burden of increasing medical expenses and health care costs?

Whether it be doctor bills, pharmaceutical costs, or installing a stair lift, elderly people have many needs and additional expenses beyond what their income allows, but they have equity in their home. As an alternative to informally loaning your parents money, setting up a personal mortgage to them may be the answer.

Susan lived closer to her parents than her four siblings. When her mother began having health issues they decided to hire a caregiver. She needed someone to help with her exercises, meals, and bathing. Initially, it was a few days a week, but eventually, 24-hour assistance was required. Her parents could not afford it and they were not eligible for traditional loans. Susan began loaning them money.

When she consulted an elder law attorney, he told her it was not a good idea. “I’ve seen it happen too many times,” he said. “One sibling pays out of pocket. The parents die, but then the child is not reimbursed when the estate is settled because it was not a formal loan.” Susan’s attorney suggested a personal mortgage (also called an intra-family mortgage) with a formal interest rate.

The interest rate must be at least what the IRS has established as the annual federal rate. It can be open-ended, allowing you to give them $50,000 one month and $10,000 the next. The mortgage actually becomes a formal note or lien registered with the state. When the house is sold, the note/loan is settled.

For Susan and her parents, a personal mortgage was the best solution. It relieved her father from the stress of trying to figure out how to come up with the money. It gave him back his independence. “And it’s not charity,” says Susan. “My father is happy knowing that one day I will be paid back, with interest.”

A personal mortgage also decreases the likelihood of strife when it comes time to settle the family estate. It’s a formal business arrangement. Your parents remain in control and they decide how the money you loaned them will be spent. There is no question about whether or not the money was lent. It’s all documented.

Points to remember:

  • Consult an elder law attorney to draft a personal mortgage.
  • Officially record the mortgage with a state agency, placing a lien on the property.
  • Keep accurate records. Document all money disbursed.

How are you funding your parents’ long-term care? 

 

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