Paying off debt of a family member - gifting rules apply?

[baileyboomer]

Hi MM, long-time lurker from way back in The Nest days. I have a situation that I'm hoping this board can offer advice on.

Long story short, DH and I have recently found out that his 80 year old mother owes ~$90K in debt; about $20K on a car, $30K on a HELOC (taken out to pay off previous CC debt), and $40K in credit card debt spread out over 9 accounts. She has no income other than $2,300/month from Social Security, and she cannot cover even the minimum payments on all of her monthly bills. Many, but not all, of the CC accounts are on a balance liquidation plan with a lower interest rate and monthly payment.

We are in a position that we can pay these debts in full by selling some investments, and we want to do this for her but are concerned about this exceeding the federal tax-free annual gifting amount and her being taxed on it. Has anyone dealt with this before? If we pay the creditors directly, does it still count as a gift to MIL? 

If we need to pay it off over the course of a couple of years to avoid a gift tax, we will, but the preference is to clear it all out at once, and then make sure she never gets into this situation again. 

[archiethedragon]

What you want to do is very sweet but a very bad idea

[baileyboomer]

archiethedragon, I'm guessing you say that because the assumption is that she'll go back into debt? If for another reason, please clarify

If the former reason - I do understand that, and there is definitely anger that we're even in this situation. This is a one-time payoff, we will not do it again and she will know this. But we are in a very healthy financial position where we can do this for her with zero impact on our daily lives or our long-term finances. Having just found out about her situation, DH and I are in agreement that we won't let her drown in her current debt when we have the resources to help her. 

[tealblue]

I agree, that’s a very nice thought but I don’t know that you should cash out your investments to pay for this. That’s a lot of debt for an older person.

I would talk to an elder attorney. I would be concerned about repercussions to their income and any potential ramifications if they moved to a long term care facility as I think there are lookback periods.

I would ask the attorney what debt can be “ignored” for a lack of a better word. If she died, would you be responsible for the credit card debt? Who cares if her credit is ruined if she has a house and a car.

These are rhetorical: Is $2300/month enough for them to live on? Are they in good health?Essentially there is $70k of built up credit card debt here, partially securitized by her house and the rest is unsecured. How quick did this build up? What has been purchased/is she being scammed?

Just don’t throw your money at this problem without seeing what the underlying issues are and covering yourself.

Edit- she wouldn’t be taxed as a gift recipient, you would be responsible for paying gift taxes and filing a return. I think you still can give millions but It’s been a long time since I’ve been in public accounting and didn’t have gift issues.

[baileyboomer]

tealblue, Thanks - that's very helpful, and I hadn't thought of repercussions to her income and ramifications if she were to move to a facility in the future. Her long term plan is to move to a Masonic Lodge, as she does meet their eligibility requirements. Speaking to an attorney is a very good idea and something we'll do.

The debt has built up over the past 12 years, since DH's father passed away; his pension ended with his death, and she began to lean on credit that just kept building because she couldn't pay it down. She claims that she now could live no the $2,300/month without the other debt hanging over her head - especially now that we know of the problem and can "monitor" her needs. I don't believe she's being scammed, but having an in depth discussion on how she got here is something that DH has to do with her. I'm also so very angry that the credit card companies continued to extend her new lines of credit; she has (had, as all cards have been destroyed) at least 4 accounts with Chase, 2 with Discover, and others.

I do want to reiterate that cashing out these investments is not a deciding factor here. You've given me a lot to consider regarding her future income/repercussions, and it's something DH and I need to discuss with someone who can explain the ramifications to us in detail. But if we are able to pay off the debt without negatively affecting her, we will do it in a heartbeat.

[tacokick]

You have to report gifts over 16K/year but taxes aren’t an issue until you hit $12.06 million lifetime (as of 2022).

I’m not sure if I would want to dip into my savings now for debt that would eventually be paid by her estate. If her estate ends up being small, they will be discharged. I’d talk to a financial advisor/estate attorney and see what they think.


If it was me, I’d see about selling the car and paying for a cheaper one out of pocket and maybe paying off some of the non credit card debt to get the payments down to what is more manageable? Downsizing in some other way?

[tacokick]

Jun 29, 2022 20:14:36 GMT -5 tealblue said:

I would talk to an elder attorney. I would be concerned about repercussions to their income and any potential ramifications if they moved to a long term care facility as I think there are lookback periods.

This is a good point. I do think they are largely concerned with the elderly person doing the gifting not the other way around. Having a low income and some debt might actually work in her favor when it comes to potentially needing Medicaid.

[flygirl]

If she sold her house and moved-would it pay off her debt? It would make the most sense for her to move now into an elder care facility if she could sell the house and cover the debt. That way you would only have to sell investments to pay for her care as needed.

[baileyboomer]

Jun 29, 2022 20:47:48 GMT -5 flygirl said:

If she sold her house and moved-would it pay off her debt? It would make the most sense for her to move now into an elder care facility if she could sell the house and cover the debt. That way you would only have to sell investments to pay for her care as needed.

Yes, the sale of her house would cover her debts in full. I don't know that she's ready to move yet. Her entire support system (extended family) lives in her immediate area, and the masonic home that she's planning to go into is across the state. DH and I live on the opposite coast than her. We did talk about the possibility of selling the house and moving her into a local rental, however.

[hazelden]

I wouldn't pay that debt using your own money.

I'd sell the car and get her a car for about 10k, and then I'd pay off the HELOC so she doesn't lose her house.

What would it look like if you bought her house and had her continue living there? What would it look like if she sold her house?

The credit card companies can't really do anything to her at this point, I don't think. She probably won't need good credit in the future and I don't think they can garnish social security income. There may be a way for CC companies to withdraw funds from her checking account if there's a court order. I'd look into what the consequences are for not paying the CCs, and try to save that money if possible. The car and house are secured debt, so they need to be sold or paid off.

[clairebear]

I would be very very hesitant to pay off such a large amount. How is that going to effect your retirement plans? I wouldn't hurt your financial future for bad decisions of someone else. If you are insistant on paying off her debt I would have some ironclad rules in place that are explicitly outlined, including a budget and some sort of financial accountablility for the future. My MIL is terrible with money and is always coming to us for a loan. H always says its the last time, but she knows that he always ponies up. It's hard to make such a large gift and the recipient not expect more in the future. If she got a HELOC to cover past CC debt and then turned around and somehow got into 40k more CC debt, she doesn't seem to be making good decisions. It's hard to believe that she would suddenly change course and live on a tight budget of $2300/month. 

I would look at her options: selling the car and buying a less expensive one, or maybe voluntary repo, selling the house and moving into a smaller rental, etc. As she is elderly I'm hesitant to pay off the CC debt. Can you just let that go unpaid? She'll be sued, but they can't take SS and she most likely doesn't need a good credit score anymore. Definitely talk to an attorney first though before defaulting on the CC debt! If you do want to assist financially, perhaps look into helping with moving costs, buying a cheap cash car, etc. It's really nice you want to help, but I would think long and hard about if it's the best move. 

[simpsongal]

Agree w/others, I wouldn't pay off the debts for all the reasons mentioned. Even if you have money to burn, there's a good chance she could negotiate the debts down, settle them, have them discharged in bankruptcy or when she passes, etc. Pretend you and DH are not a factor in this w/funds capable of bailing her out. Those companies shouldn't have extended so much credit to her, so I wouldn't feel any kind of way about settling up her debts. I *might* consider paying the HELOC just to make sure she keeps her house.

[sometimesrunner]

Does your H have siblings that would potentially benefit from you paying off the debt? I agree with others that I would be very hesitant to proceed, but if you have your heart set on it, you can each give her $16k per year without having to file an additional tax return. If you decide to go over that amount, you'll have to file an additional tax return, but there won't be any tax due based on the numbers you've listed.

[dexteroni]

Jun 29, 2022 19:56:00 GMT -5 baileyboomer said:

and then make sure she never gets into this situation again. 

How would you do this? It sounds like she already took out a loan to pay off past CC debt and then ran up more. Short of taking all her money and only letting her spend with your permission (which is next to impossible when you're right there, let alone across the country) I don't see how you could possibly make sure it won't happen a third time. I agree with the PPs who are saying talk to an elder care lawyer about repercussions of this, and also which debts have to be paid and which can be ignored for now. Good luck! Caring for aging parents and the issues that come with it is hard.

[Deleted]

Jun 30, 2022 7:31:00 GMT -5 simpsongal said:

Agree w/others, I wouldn't pay off the debts for all the reasons mentioned. Even if you have money to burn, there's a good chance she could negotiate the debts down, settle them, have them discharged in bankruptcy or when she passes, etc. Pretend you and DH are not a factor in this w/funds capable of bailing her out. Those companies shouldn't have extended so much credit to her, so I wouldn't feel any kind of way about settling up her debts. I *might* consider paying the HELOC just to make sure she keeps her house.

This is where I'm at as well. It's not like she is going to buy another car or house at this point in life, so I wouldn't honestly worry about the cards and just figure out how to keep her in the house until she can sell it. Then she can pay her cards and take whatever steps make the most sense. 

I'm sure there is a lot of emotional guilt here that your DH feels like he should care for his mother, but financially speaking I wouldn't let the emotion overrule the logic of what should happen.

[baileyboomer]

I appreciate your comments and suggestions, and they've guided additional conversations between DH and I. We are going to speak to an attorney about this, but the desire to pay off the debts in full remains. Leaving the credit card debt unpaid puts MIL in a position where she'll be hounded by creditors/collections, and it becomes a quality of life issue for her as well. A big part of how she got into this situation is that she was too proud to ask for help; now that we know about the issue, we want to and have the means to help her financially. That said, I think it's a great suggestion to try to negotiate some of the CC debt down before making payments on it. This is something we'll look into as well. We will prioritize paying off the HELOC, then make a decision on what to to do with the car before finally tackling the CCs.

DH has one sibling who would possibly benefit financially (through estate settlement) if we pay off all the debt. His sibling isn't in a position to be able to help financially; in an ideal world, when the house is eventually sold, we will be repaid for this before the remainder of the estate is disbursed. However, we're going into this with the understanding that that may not happen and we're OK with that outcome as well if need be. The idea of us buying the house and her continuing to live there is intriguing and something we should discuss in more detail. We could purchase it outright so we don't have to deal with a second mortgage, then put it back on the market when it is time for her to move to a facility.

To avoid this moving forward; there's no 100% way to ensure she doesn't go back back into debt, but we both believe that since we've opened the door, she will be willing to reach out if/when she finds herself in a situation where she isn't able to afford her ongoing expenses. We've even discussed (among ourselves, not with her yet) the possibility of supplementing her social security income with $500 or so a month. We want to take care of her and for her not to have to worry about money.

[tacokick]

Jun 30, 2022 16:25:44 GMT -5 baileyboomer said:

DH has one sibling who would possibly benefit financially (through estate settlement) if we pay off all the debt. His sibling isn't in a position to be able to help financially; in an ideal world, when the house is eventually sold, we will be repaid for this before the remainder of the estate is disbursed. However, we're going into this with the understanding that that may not happen and we're OK with that outcome as well if need be.

I’m not sure why you would be repaid before the estate was disbursed. You wouldn’t be a creditor, you are gifting her the money. Unless there is something specific in her will bequeathing you the exact amount you gifted her as an inheritance that’s not how it works. You don’t get gifts back after someone dies; her assets would be divided as the will dictates.

Unless you mean she might sell her house when she is living and pay you back. If she does that, it would be part of what Medicaid looks for during the look back period which is something to keep in mind.

Good luck!

[baileyboomer]

Jun 30, 2022 17:13:27 GMT -5 tacokick said:

Jun 30, 2022 16:25:44 GMT -5 baileyboomer said:

DH has one sibling who would possibly benefit financially (through estate settlement) if we pay off all the debt. His sibling isn't in a position to be able to help financially; in an ideal world, when the house is eventually sold, we will be repaid for this before the remainder of the estate is disbursed. However, we're going into this with the understanding that that may not happen and we're OK with that outcome as well if need be.

I’m not sure why you would be repaid before the estate was disbursed. You wouldn’t be a creditor, you are gifting her the money. Unless there is something specific in her will bequeathing you the exact amount you gifted her as an inheritance that’s not how it works. You don’t get gifts back after someone dies; her assets would be divided as the will dictates.

Unless you mean she might sell her house when she is living and pay you back. If she does that, it would be part of what Medicaid looks for during the look back period which is something to keep in mind.

Good luck!

Yes - that's what I meant; an update to her will bequeathing us that amount before remaining assets are divided. We will ask her to do this. But again, if for some reason it's not done and all assets are divided equally (or however the will dictates), we are OK with that outcome as well, though it's obviously less desirable.

[tacokick]

Jun 30, 2022 17:25:18 GMT -5 baileyboomer said:

Jun 30, 2022 17:13:27 GMT -5 tacokick said:

I’m not sure why you would be repaid before the estate was disbursed. You wouldn’t be a creditor, you are gifting her the money. Unless there is something specific in her will bequeathing you the exact amount you gifted her as an inheritance that’s not how it works. You don’t get gifts back after someone dies; her assets would be divided as the will dictates.

Unless you mean she might sell her house when she is living and pay you back. If she does that, it would be part of what Medicaid looks for during the look back period which is something to keep in mind.

Good luck!

Yes - that's what I meant; an update to her will bequeathing us that amount before remaining assets are divided. We will ask her to do this. But again, if for some reason it's not done and all assets are divided equally (or however the will dictates), we are OK with that outcome as well, though it's obviously less desirable.

Would that be something the other potential heirs would be okay with? It’s a little different to have the estate pay off debts to creditors than it is to have one family take an inheritance off the top potentially leaving others with very little. Especially if the other heirs can’t contribute financially to pay off her debt and you say that this amount of money won’t make a difference to you. Maybe they wouldn’t care but it’s something I’d think about.

[ellipses84]

I agree with others that you should talk to a financial planner and an attorney who specialize in estate planning, because there may be repercussions you aren’t thinking of for whatever you decide to do. Also, they can help you figure out what to put in place so this doesn’t happen again.

Before paying off the debt, you may want to consider talking to a reputable debt relief company. They will negotiate with each credit card company to payoff each balance in full / stop interest and set her up on a single monthly payment plan, which she or you could payoff sooner. It can cause a slight hit to her credit, but it doesn’t matter much at her age and will bounce back up. The one rule is she has to stop using all her credit cards which would probably be a good thing. If you are willing to support her monthly, you could add her to one low limit card in your name if it’s a necessity so she could use it but you could monitor it and pay it off monthly. If you decide to pay it off, you could try to negotiate with each credit card yourself, but I think the companies are way more successful. Don’t feel obligated to pay off her debt. She could also consider a type of bankruptcy that would allow her to keep her vehicle and house.

[rooster222]

I've dealt with this on a much smaller scale. My grandma, 88, has some medical debt that she just could not really afford. We could have paid it off for her but I'm also considering needing to help support her when her small savings runs out. We let it go to collections. I may eventually try to settle it at 10%.

She's lived in a few different assisted living places and there has never been a credit check, so I wouldn't be too concerned with credit score.


Can she file bankruptcy on the credit card debt? Can you buy her car from her so that it's in your name, so should something happen to her, you will own the car?

I'm not sure about the HELOC but I'd say it depends what her house is worth.

[sometimesrunner]

Jun 30, 2022 19:19:33 GMT -5 mofongo said:

Jun 30, 2022 18:50:15 GMT -5 tacokick said:

Would that be something the other potential heirs would be okay with? It’s a little different to have the estate pay off debts to creditors than it is to have one family take an inheritance off the top potentially leaving others with very little. Especially if the other heirs can’t contribute financially to pay off her debt and you say that this amount of money won’t make a difference to you. Maybe they wouldn’t care but it’s something I’d think about.

Agreed, you either pay it off, or not. I don’t think it’s fair to the other siblings to arrange something like this.

Lord knows death bring up strange feelings about money.

I mean, they'd get the same amount regardless, right? 

If her house sold for $210k, the first 90k goes to the creditors and the heirs split the remaining 120k, each receiving 60k.

Or in this situation, $210k house proceeds and the first 90k goes to kid 1 for loan repayment; the remaining 120k to split between heirs. The other sibling is not getting screwed in this situation. They're actually benefiting from the mom not paying tons of interest on the debt for the rest of her life. 

If a sibling of mine stepped in and did this, I would have no problem with them getting the first 90k. I would not expect to receive $45k more because my sibling was generous enough to pay off our mother's debt. I would expect to be in the loop about this and part of the discussion. I wouldn't want to find out years later after the fact. 

[niq]

Jun 30, 2022 19:19:33 GMT -5 mofongo said:

Jun 30, 2022 18:50:15 GMT -5 tacokick said:

Would that be something the other potential heirs would be okay with? It’s a little different to have the estate pay off debts to creditors than it is to have one family take an inheritance off the top potentially leaving others with very little. Especially if the other heirs can’t contribute financially to pay off her debt and you say that this amount of money won’t make a difference to you. Maybe they wouldn’t care but it’s something I’d think about.

Agreed, you either pay it off, or not. I don’t think it’s fair to the other siblings to arrange something like this.

Lord knows death bring up strange feelings about money.

... doing a true-up at death/inheritance seems totally fair to me? This is what my sister & I did since I was in a better position to help mom than she was.

Just make sure everyone reaches an agreement beforehand. 

[niq]

If you give your mom money or pay her bills it can affect her eligibility for low-income programs -- the money counts as her "resources". We ran into this with my mom, since she was on a family cell phone plan, that counted towards her eligibility for low-income senior housing. It wasn't enough to matter in our case but they do want it documented (and failing to document resources can affect program eligibility and just generally cause a bunch of bureaucratic hassle).

The exact rules vary program-to-program. As long as she's within the spirit of things the folks running these programs don't seem to care too much. Big picture they're trying to stop people who are getting $2,300 SS check and also $2,000/month from their successful son and daughter-in-law from qualifying for affordable senior housing.

As far as other options, is there a senior apartment -- not independent or assisted living, but just a complex that caters to seniors -- with cheap rent where she lives? You could sell the house and move her into there, and just draw down savings to pay the rent. I think she'd be highly likely to outlive her savings.

Also if you're cash flow positive, taking out an LOC/borrowing against your investments and then paying the loan back quickly might make more sense than liquidating given current market conditions. It sounds crazy when I write it but your situation seems pretty niche.

[tacokick]

Jul 1, 2022 10:30:56 GMT -5 sometimesrunner said:

Jun 30, 2022 19:19:33 GMT -5 mofongo said:

Agreed, you either pay it off, or not. I don’t think it’s fair to the other siblings to arrange something like this.

Lord knows death bring up strange feelings about money.

I mean, they'd get the same amount regardless, right? 

If her house sold for $210k, the first 90k goes to the creditors and the heirs split the remaining 120k, each receiving 60k.

Or in this situation, $210k house proceeds and the first 90k goes to kid 1 for loan repayment; the remaining 120k to split between heirs. The other sibling is not getting screwed in this situation. They're actually benefiting from the mom not paying tons of interest on the debt for the rest of her life. 

If a sibling of mine stepped in and did this, I would have no problem with them getting the first 90k. I would not expect to receive $45k more because my sibling was generous enough to pay off our mother's debt. I would expect to be in the loop about this and part of the discussion. I wouldn't want to find out years later after the fact. 

They may or may not, it depends on the debt at death. Sometimes creditors will wave the debt or greatly reduce it if the person has died. They might be open to negotiations now if they contacted them and explained the situation. There are a lot of variables here that might result in much less than 90k being owed to anyone.

Subsidizing her also might create some issues if OP ever wasn’t in the position to help again/help continuously. If charities and social services see that you have been giving her regular money and paying off debt, it might disqualify her from any services in the future even if they weren’t helping any longer.

A lot is hinged on OP being able to pay for for another household’s bills and her own for an indefinite amount of time and the hope that despite running up credit cards to the tune of tens of thousands at least twice, it won’t ever happen again.

As I said, this is something that I would want to discuss with the other heirs. Emotionally one family getting a cut off the top who “doesn’t need it” might feel different to the other heirs than paying off her credit card bills out of the estate. Death and money are tricky business and it doesn’t sound like the OP and the other heir(s) are in the same place financially. What if they pay off the 90k, she runs up more debt and no one else ends up with anything? Is everyone okay with that? Maybe it doesn’t matter if they are but it’s something to keep in mind IMO.

[Deleted]

It feels like you are making an emotional decision rather then a financial one. I understand as it sounds like you have a lot of love for your MIL but don’t mix money and emotions. Talk to an attorney and do the right thing financially and not emotionally. You will get to where you and your MIL want to be, it will just be a smarter financial move rather then a less smart emotional decision.