I am age 87, retired and disabled. My wife is 78 and working part-time but looks forward to retiring soon. We own a home with a substantial mortgage, have a modest IRA, and about $70,000 in savings. We are being hit by excessive, crushing health insurance costs and our resources and social security income now are not quite enough to maintain a decent living standard. Our daughter has offered to help and we have discussed lending our savings to her business long term at 10% interest, which would be taxable income to us. Our daughter is also willing and able to donate some 'gift money', if needed. Any alternate ideas? Can I structure a plan where there will be no tax on the interest income? Or some kind of gift arrangement that would better?
Generally, we would advise against intra-family loans where this is your total life savings you're putting at risk. What happens if your daughter’s business stops doing as well as it has and she can no longer pay you 10% or perhaps even pay back the money you deposit with her. Why not leave the $70,000 in an FDIC insured bank account and let your daughter make gifts to you and your wife, if she can afford to do so? Your daughter can give each of you $13,000 a year gift_tax free. If she is married, she can give you twice that amount.
But there may be better alternatives. First, you and your wife may borrow money on your home either from in bank through a traditional mortgage or line of credit or through a reverse mortgage. Reverse mortgages are available for seniors who cannot qualify for traditional bank financing. They have always been treated as last resorts in large part due to their cost, but the cost has recently come down, making them more attractive. However, you can usually borrow only about half of the equity in your home under a reverse mortgage and the loan must be paid back after you and your wife move out of the house for any reason.
Another alternative would be for your daughter to lend you the money you need, but for there to be a promissory note a mortgage so that she gets paid back when the house is sold. We call this a “private” reverse mortgages. This approach has many advantages:
1. It is cheaper than a bank loan or commercial reverse mortgage.
2. Your daughter can lend you as much as you need and she can afford, not just up to half the equity in the home.
3. There’s no forced sale of the house at what may be an inopportune time.
4. Your daughter will be repaid what she lends to you, which can help avoid complications with siblings, if you have other children.
5. This can also provide some Medicaid protection if you or your wife ever need nursing home care.
However you choose to go ahead, you should document it in writing so that you make sure that everyone has the same understanding of what the deal is. An elder law attorney can help with this process and make sure that the agreement meets all necessary legal requirements.