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Elderly Parents - Rent vs. Buy
Old 02-11-2007, 01:36 PM   #1
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Elderly Parents - Rent vs. Buy

My wife and I are assisting her elderly parents (mid 70's) in selling their long time home. Best guess is, they'll have approximately $1M net from the transaction.

They'll be moving from the SF Bay area to San Diego, where they'll be closer to more of their children. There's also a significant tax advantage available to them, should they purchase a home there. They can transfer their primary residence tax base from their home (currently under $80K) to any home they purchase down there.

Still, there's an argument to made for them renting instead of buying. Interest alone on the $1M, would get them a very nice rental - probably better than anything they could purchase. There's also additional flexibility that comes with renting, particularly if health issues require one or both of them to move in with children or into elder care.

However, their concern is with the $1M in liquid funds, and protecting it. My in-laws have expressed concern that having a "target" like this is troubling to them.

Other than the pros/cons of renting vs. buying mentioned above, what are the financial and risk considerations they should be aware of in making this decision? Are there steps they can take to protect his sale proceeds, that might give him the same sense of security as owing a primary residence?

Thanks much for any feedback.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 02:16 PM   #2
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Re: Elderly Parents - Rent vs. Buy

We are in the process of selling my in-laws home of 40 years but, unlike yours, mine are confined to a nursing/assisted living facility for the rest of their lives.

The question to ask is how long are they going to be able to live on their own? I'm going to assume there were some issues that made them consider moving from a longterm home.

In their mid 70's the possibility of independent living might be a better option. IL includes cooked meals if desired and a community of similar aged people. It will keep them from sitting around waiting for one of the kids to show up to talk with them.

I'm biased because of all of my in-law problems to encourage you to consider and explore this option. Getting elderly people out of their home is tough and now would be the best time to get them somewhere where they would be watched a little closer.

If they are worried about the money not being in real estate, now would be the time to have a committee of heirs appointed by them to manage their assets very conservatively.

I would only encourage them to buy another house if they were both in excellent physical shape with no apparent limitations. Even then, it's time to downsize and simplify. Put a big chunk of their assets in something liquid for the likely time they will need some additional care. Real estate is fickle. They may not do as well on their next property. They almost certainly won't be in it as long.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 02:26 PM   #3
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Re: Elderly Parents - Rent vs. Buy

Obviously they should have a good umbrella liability policy in the $1-2M range. Is that the sort of 'protection' you're looking at, or investment loss 'protection'?
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 02:30 PM   #4
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Re: Elderly Parents - Rent vs. Buy

If they were to net 1M they could stick that amount in PenFed, currently at 5.83% dividend rate for a 7 year certificate. That would spin off $3643/month after paying 25% tax rate. As you say - that oughta get them a pretty decent rental in Sandy Eggo, no? And the $1,000,000 just sits there, safer perhaps than a SoCal house built on Jello, and subject only to the whims of inflation. Just an example, but i sure think renting would be the hot ticket for them...IMHO.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 02:57 PM   #5
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by Cute Fuzzy Bunny
Obviously they should have a good umbrella liability policy in the $1-2M range. Is that the sort of 'protection' you're looking at, or investment loss 'protection'?
It's nothing specific that concerns them. Correct or not, they are under the impression that they have greater asset protection if the $1M is tied up in a primary residence.

The concern being, that some unknown future creditor, medical need, or legal judgment could attach the $1M, leaving them unable to pay rent, having no home, and living on a meager SS income. If they own a home outright, they feel insulated from this risk. Whether they actually are or not, is perhaps the question.

It sounds like a reasonable concern to me, but I've zero experience in this area. There may be no difference in risk between the two options, there may be ways of mitigating the liability of a large liquid investment, or buying a home might be significantly less risky for them.

None of us know the answer. I'm sure discussing this with an estate attorney would be wise, but I was hoping for some general thoughts from folks with more experience in this area before we take that step.

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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:06 PM   #6
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by Gotta Go
It's nothing specific that concerns them. Correct or not, they are under the impression that they have greater asset protection if the $1M is tied up in a primary residence.

None of us know the answer. I'm sure discussing this with an estate attorney would be wise, but I was hoping for some general thoughts from folks with more experience in this area before we take that step.

I assumed they were worried about investment loss. That should be a concern. I don't care what their backgrounds are. The day will come in the not too distant future that they won't be throwing their fastball anymore.

I agree that you need to see an estate lawyer. California has exciting probate costs and taxes. I don't know the details but a couple thousand spent on lawyering up will probably pay big dividends.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:07 PM   #7
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Re: Elderly Parents - Rent vs. Buy

Better question for one of our resident lawyers; the primary residence is protected in some cases.

Do point out to them that they're liable for things that happen on or originate from that property...something thats a little less of a concern if they're renting. A lot of litigious people also start off their investigations on whether someone is 'worth suing' by checking public property records.

I'd bet a fair % of potential plaintiffs would look at an elderly couple living in an apartment or rental house and driving a mid-range sedan and just move along...sometimes you dont have to shoot the bear, but just look relatively un-tasty.

Some type of trust, corporation, llc or lp and a good $2m umbrella might do.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:07 PM   #8
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by 2B
In their mid 70's the possibility of independent living might be a better option. IL includes cooked meals if desired and a community of similar aged people. It will keep them from sitting around waiting for one of the kids to show up to talk with them.
Basically, this won't fly. They are adamant about remaining independent. They have accepted the need to downsize, be it a much smaller home or a condo, but they won't live in assisted living at this point.

Neither of them are in excellent health. Which is another reason the kids like the rental option, as it would seem to allow us to step in and manage things much more quickly if need be, and with less hassle than selling yet another home.

Still, the primary concern is not their estate, nor what is easiest for the kids. Much as we have thoughts as to what is best for them, they'll make up their own minds. If we can gently nudge them in directions that are good for all of our interests, and they listen, we'll consider that a success.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:15 PM   #9
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Re: Elderly Parents - Rent vs. Buy

One other tidbit...aside from assisted living, look into getting them a rental place in one of the 'active adult' communities like the dell webb/sun city place. I think theres one down near san diego in riverside.

Basically they're no different from a regular single family residence, but the community has a heck of a lot of progressive "help" you can get as you go along...from common activity centers to available car/bus services from your front door. Everyone even pitches in and reports particular skills or known-good contractors to do work that seniors find they cant fulfill anymore.

That would let them transition from being fully independent to taking on as much help as they feel is appropriate as they age.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:22 PM   #10
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by Gotta Go
My wife and I are assisting her elderly parents (mid 70's) in selling their long time home. Best guess is, they'll have approximately $1M net from the transaction.

They'll be moving from the SF Bay area to San Diego, where they'll be closer to more of their children. There's also a significant tax advantage available to them, should they purchase a home there. They can transfer their primary residence tax base from their home (currently under $80K) to any home they purchase down there.
I would have a hard time giving up that Prop 90 tax base transfer. You're talking $10K+ a year subsidy from the state of CA in perpetuity! It can be transferred to the children or one child under a Prop 58 if you do it correctly. Alot of people screw this up and lose it.

Plus you're giving up the appreciation, stability, and possible reverse mortgage.
Quote:
Originally Posted by calmloki
If they were to net 1M they could stick that amount in PenFed, currently at 5.83% dividend rate for a 7 year certificate. That would spin off $3643/month after paying 25% tax rate.
$3643 a month tied up in a 7 year CD won't seem like much when one of them goes into a nursing home at $6-7K a month and the one at home still has a rent payment. Plus the house is protected to some extent for the at home parent.

Of course the important thing is what the parents are comfortable with and the participation of the children.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:25 PM   #11
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by Gotta Go
Basically, this won't fly. They are adamant about remaining independent. They have accepted the need to downsize, be it a much smaller home or a condo, but they won't live in assisted living at this point.
There is a major difference between independent living and assisted living.  They my not see it that way but in IL they can have a car, go and do.  The advantage is they have a collection of "friends" right there, meals can be eaten in the dining area or they can sit in their rooms and pout.  It's up to them.  They are still responsible for almost everything else.

I'd recommend trying to get them to check some places out.  It would be good if you or one of the other kids scout out a few places.

Quote:
Originally Posted by Gotta Go
Neither of them are in excellent health. Which is another reason the kids like the rental option, as it would seem to allow us to step in and manage things much more quickly if need be, and with less hassle than selling yet another home.
That's settles it for me.  If their health is starting to go it will get worse quickly.  My in-laws fought like hell to stay in their home.  My FIL with Alzheimer's is still ready to move back home and bring his wife with him.  He sees her getting better every day.  You need to encourage independent living; and if you can't get them to do that, they should rent something small and close to one or more of their kids.


Quote:
Originally Posted by Gotta Go
Still, the primary concern is not their estate, nor what is easiest for the kids. Much as we have thoughts as to what is best for them, they'll make up their own minds. If we can gently nudge them in directions that are good for all of our interests, and they listen, we'll consider that a success.
They day will come -- very soon -- where they will not be able to manage their own assets.  They need to get to a lawyer and get their estate set up for cruise control and name someone as having power-of-attorney.  Work to avoid the mom naming dad and visa versa.  It needs to go to one of the kids with several kids lined up as alternates.

It's not a question of inheritance.  When they're dead you all can split up what's left.  Right now they are vulnerable and not in the position to make the best decisions.  The alternative is let them get robbed and all the kids can pay for their living for the rest of their lives.

I'm sure that in a few more months my FIL would have successfully pissed away what little he had other than his house.  If someone would have then hit him up with a reverse mortgage he'd then have done that and blown through that.  He didn't want to lose his independence or be a burden to his children -- no matter how many times my DW had to go deal with their issues.

Old people get illogical when they start to lose it and do things that leave you in amazement.

It would be good if all of the kids got together and developed a common understanding and united front.  We dealt with my SIL long distance who fought what seemed obvious to me and my wife.  Of course, it was always what we could do but not her.  

Again, I am in the middle of a very difficult situation. It didn't need to be this way. My in-laws could have helped several years ago but didn't.

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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:32 PM   #12
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by 2B
Old people get illogical when they start to lose it and do things that leave you in amazement.
You mean like when my 73 year old dad says "Hey Gabe...watch this!" and then does one of the things that I know will take me months to get Gabe to stop doing?

Its like having a two year old AND a four year old...
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:34 PM   #13
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by Cute Fuzzy Bunny
You mean like when my 73 year old dad says "Hey Gabe...watch this!" and then does one of the things that I know will take me months to get Gabe to stop doing?

Its like having a two year old AND a four year old...
That's different. You father and son have a special bond because they are united against a common enemy -- you.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:48 PM   #14
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Re: Elderly Parents - Rent vs. Buy

http://www.assetprotectionbook.com/california.htm

says you get 125k dollar homestead protection.


*err and as Martha states a max of 150k protected from creditors *

They would probaly do better setting up a trust. Although that has its own issues.
Although from my understand it would be easy from an estate perspective as well.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 03:49 PM   #15
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Re: Elderly Parents - Rent vs. Buy

I am only going to touch on one minor point, the issue of what is protected from creditors. I am not a California lawyer, but what is exempt from creditors under California law is pretty straightforward. With respect to the home, the following is exempt:

Real or personal Property you occupy including a mobile home, boat, stock cooperative, community apartment, planned development or condo to $50,000.00 if single and not disabled; $75,000.00 for families if no other member has a homestead; $150,000 if age 65 or older, or physically or mentally disabled; $100,000 if 55 or older, single and earn under $15,000 or married and earn under $20,000 and creditors seek to force the sale of your home; sale proceeds exempt for 6 months after received (husband and wife may not double the amount and may file a homestead declaration.

Here is a link to the Calfornia exemptions:


http://www.leginfo.ca.gov/cgi-bin/di...04.710-704.850

Based on this information, if your parents are at least 65, they can only shelter $150,000 from creditors in a home.

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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 04:00 PM   #16
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Re: Elderly Parents - Rent vs. Buy

I absolutely agree with others that they should talk to a CA estate planning attorney.

Passing along the house exemption may require that they buy the house and live in it for a couple years, then sell it to one of their kids (grand-kids??). Is there a family member in a position to buy the new house from them for the money they put into it If not then the tax exemption isn't in play for the next generation(s).

They are not a lot older than myself and my husband. I assure you, our next residence will not be a house.

$1M sounds a lot, but if all they have in savings is their equity in their home the don't really have much of a cushion for care should they need it. You or another trusted family member should sit down with them to noodle out their income flow. Do either have any pension in addition to Social Security? Are there other savings that could be available? This is a consideration whether they buy or rent.

There are retirement communities where active seniors can do their thing but where continuing care is available. The come in all kinds of prices. Unless the family wants to do the home buy-out two step they should really explore all options first. By the time that they are 80 the odds that one of them will need assistance with daily living is high.

[fixed typo]
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 04:05 PM   #17
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Re: Elderly Parents - Rent vs. Buy

Oh and if California had a good homestead exemption OJ simson wouldnt of moved to florida
He managed to protect a lot of his money by buying a home here.
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Re: Elderly Parents - Rent vs. Buy
Old 02-11-2007, 04:50 PM   #18
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Re: Elderly Parents - Rent vs. Buy

Quote:
Originally Posted by Brat
I absolutely agree with others that they should talk to a CA estate planning attorney.

Passing along the house exemption may require that they buy the house and live in it for a couple years, then sell it to one of their kids (grand-kids??). Is there a family member in a position to buy the new house from them for the money they put into it If not then the tax exemption isn't in play for the next generation(s).
Exemption from reassessment under Prop 58 only requires transfer/sale/inherit from parent and notification to Assessor and can be passed again and again parent to child, child to parent. Does not require residence in property or even state. Lots of multimillion dollar properties stay in the family because of this even though family members may have not lived in the property for decades.
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Re: Elderly Parents - Rent vs. Buy
Old 02-14-2007, 01:42 PM   #19
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Re: Elderly Parents - Rent vs. Buy

My opinion. You might consider reviewing the medicaid rules of the state where your parents reside. This can be particularly important when one spouse needs to go to a nursing home. In certain states, the spouse (of the person going to a nursing home) is able to keep the house, car and other property plus a certain amount of the other assets (investments, cash, etc...). Of course the value of the house can come into play. I doubt the state would let a spouse keep a $MM house and have the stat pay for the nursing home care.

For example: depending on the situation, the surviving spouse might be better off owning a home with a worth that equals the legal limit. The remaining assets would be subject to state regulations.

Certain states are much more spouse/asset friendly. I checked this out a few years ago because my father needed to go to a nursing home. In his home state, the spouse was able to keep the house (in their case was about $100k -- not sure of the state limit on the value of the house) plus 1 car and basic personal belongings. the spouse could keep only $90,000 in other assets [investments, savings accounts, etc] and approx $21k in pension and SS). The neighboring state allowed the spouse to keep the house a car and split the assets in half. This would have allow my mother to keep much more than $90k.


In short this subject requires a little research because of other considerations... many elderly will people wind up going to nursing homes due to prolonged illness or because the spouse cannot care for the sick spouse. Your decisions regarding the house may enable the surviving spouse to keep more assets.

Since they have $1mm in assets, it might make sense to contact an attorney that specializes in estate planning. Depending on your parents needs a trust might make sense.
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