My father-in-law, 81, sold his $75,000 home and paid off his daughter's $50,000 debt. What happens to him now?

By Quentin Fottrell

'Nothing has been set aside for his needs'

"I can see a very real possibility that my husband and I will eventually be expected to step in and provide financial support." (Photo subject is a model.)

Dear Quentin,

My 81-year-old father-in-law sold the family home in July for $75,000. For context, this is in a small town in Illinois, and the house was purchased in 1972 for approximately $7,500. Will he owe capital-gains taxes on the sale when he files his taxes next year?

Taking this a step further, he paid off all of his own bills and then paid off $50,000 of my sister-in-law's debt. I'm also curious about the potential tax implications for her as well. What concerns me most is that the money is gone, and nothing has been set aside for his needs.

I can see a very real possibility that my husband and I will eventually be expected to step in and provide financial support. I'm trying to understand the potential tax consequences, but I'm concerned about the bigger picture.

What happens when the money runs out and he needs financial assistance?

The Daughter-in-Law

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

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Housing instability is one of the most costly and unpredictable problems an elderly person can face.

Dear Daughter-in-Law,

Nothing about your letter inspires confidence in your father-in-law's confusing and, frankly, murky situation.

I'm afraid your father-in-law traded away his financial security. Housing instability is one of the most costly and unpredictable problems an elderly person can face. I have so many questions and concerns. Among them: Did he sell the family home to pay off his daughter's debt? Is he living with his formerly indebted daughter? Or does he have another home where he is living? Is he living solely off his Social Security? When did you discover that he had paid off his daughter's $50,000 debt? Has she agreed to a plan to repay him?

Making sure your father-in-law has a safe and secure place to live is the No. 1 priority. I assume he is relying on Social Security, for his immediate financial needs and Medicare for his medical needs. Medicaid could be an option, going forward. Selling his only home does not automatically violate the Medicaid five-year lookback rule, provided he sold it for fair market value, and neither does paying his own debts. However, he paid off his daughter's $50,000 debt, which actually could trigger the lookback rule.

"The state will look at financial transactions made during the 60 months (or five years) before they applied for Medicaid for long-term care," according to Illinois Legal Aid. "During this period, the state checks whether the applicant or their spouse gave away money or property, sold something for less than its fair market value, made property transfers into trusts, or created new annuities. If these types of transfers happened during the look-back period, a person can't get Medicaid for a certain amount of time. This is known as a 'penalty period.' "

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Alarm bells

Taxes are probably the least of your concerns. Your father-in-law's capital gain on the home sale is well below the applicable exclusion. If this were a larger house sale in a major metropolitan area, you can exclude $250,000 in capital gains as a single person (or $500,000 for a married couple) from your taxable income. He won't owe tax on the $50,000 gift, but he will have to file a federal gift-tax return Form 709 as there is a $19,000 annual limit ($38,000 for a married couple) for such gifts before you must report it. Still, it's well below the lifetime exemption.

Any sequence of events that leads a person, especially someone like your father-in-law who is 81 years old, to effectively make himself penniless and dependent on others raises serious alarm bells. Did your sister-in-law coerce or somehow pressure him into paying off her $50,000 debt? Have you had a family meeting about these financial transactions? I can only hope that he has moved in with her or has a second home where he can live. If you are concerned about his welfare, it's time for a family meeting.

There's a significant difference, legally and morally, between financial mismanagement and elder financial abuse. During your meeting, I implore you to find out whether he understood that he was giving away $50,000 instead of giving his daughter a loan, and whether the decision to do so was a voluntary one. Does he currently have control of his bank account, or are there any co-signers or, more alarmingly, co-owners on those accounts? I would not rule out reaching out for third-party help, if you suspect your father-in-law was an unwitting participant.

Third-party help includes Section 8 housing, which has eligibility requirements and waiting lists; senior housing; and subsidized apartments. Organizations worth contacting include the Illinois Department of Aging, which should be able to direct you toward legal counsel; the National Center on Elder Abuse, an agency affiliated with the U.S. Administration on Aging; the National Council on Aging advocacy group; AARP's Fraud Watch Network Helpline at (877) 908-3360; the National Elder Fraud Hotline at (833) 372-8311; and Adult Protective Services.

Illinois does not have filial responsibility laws, so adult children are not financially responsible for their parents. Given that you are concerned, however, your work may have only just begun.

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-Quentin Fottrell

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