Say what you will about Baby Boomers, but these seniors typically earned good money throughout their working lives and saved a substantial amount. Many of today’s seniors were able to set themselves up in a comfortable retirement and still have money to spare. On the other hand, their children and grandchildren have had a tougher time earning and saving. These generations have lost pension and retirement benefits, are saddled with student loan debt, don’t have the savings to make a down payment on a house, and certainly don’t have much in the way of disposable income. It is natural for the older generation to want to help the younger generations, but we have some words of warning before you do that.
Buying a House for an Adult Child
There is no doubt that homeownership is harder than ever in the U.S. Young people have a tougher time saving for a down payment and building enough credit to qualify for a mortgage. Because of this, it is not uncommon for a parent to buy a house for an adult child and have the child make the payments. This arrangement might work great for all parties involved, but the pitfall might come later for the senior homeowner. If that senior needs long-term care one day and doesn’t have the income or savings to pay for it, he might need to apply for Medicaid. While Medicaid will exempt one house, they will not exempt two houses, and, as a result, the value of that second home may need to be paid towards the nursing home before the senior can qualify for a nursing home, which could mean the child losing the house. To avoid something like this happening, it is important that these kinds of family arrangements be legally documented. If you have documentation and contracts in place, some of these pitfalls can be avoided.
Co-Signing a Student Loan for a Grandchild
No one understands the importance of a college education better than the Baby Boom generation, but before you co-sign or serve as a guarantor on a child’s or grandchild’s student loan, you should understand the potential pitfalls. Because the student loan program is federal, it is one of the few programs that can garnish federal benefits if the borrower defaults on the loan. That means that if your child or grandchild can’t make the required loan payments—even if he is unable to pay due to disability—the government could garnish your Social Security check, government pension, VA benefits, and any other federal benefits to get their money back. This could be devastating.
We’re not saying you shouldn’t help a child or grandchild pay for college, but a better option might be to make a cash gift or to pay part of the tuition directly rather than co-signing a loan.
Be Careful When You Make Gifts!
Having said that a cash gift could be a good way to help out a child, we also need to mention that timing is everything. If you are in your 60s and healthy and want to help out a grandchild with a cash gift, that’s probably o.k. But if you are older than that or are in poor health, you need to be aware that gifts you make within five years of applying for Medicaid for a nursing home will disqualify you from Medicaid benefits. It doesn’t matter why you gifted the money because Medicaid will assume you were trying to spend down your assets so you would qualify. One way around this when we are talking about helping someone pay for college is to make a contribution to a college savings account, or other approved vehicle, rather than directly to the student. That gift would not be counted as a transfer of assets by Medicaid in Texas.
Be Smart About Helping Your Children and Grandchildren
Many of our senior clients live by the adage that you can’t take it with you, so you might as well do some good with it while you are alive. We agree wholeheartedly with this sentiment, but we want you to give it away the right way—so that the care you get in your later years is not compromised because of your generosity. When you meet with one of our Estate Planning and Elder Law attorneys, we will find ways for you to help your children without jeopardizing your own security.