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Case Study: Asking Good Questions

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Most clients understand the financial planning process as it relates to their personal situation, but fail to recognize the range of topics about which advisors can be helpful. At Wisdom Wealth Strategies, each CERTIFIED FINANCIAL PLANNER™ practitioner takes a very comprehensive approach to planning and must consider all areas of a client’s situation including retirement, insurance, tax, investments, and estate planning. In order to illustrate the dynamic process, this week’s blog describes a case study with a recent client where many different elements were at play. Our client has granted his permission for us to share his story, but we’ve protected his identity by changing his name.


John Smith was referred to Wisdom Wealth Strategies by an estate planning attorney. John had recently sold the home that he and his wife, Susan, had owned for the past 45 years. When they purchased the home in 1969, the value of the home was $14,500 and the sale price in 2014 was $400,000 (a gain of $385,500), which does not include the cost of any home improvements that were made over time. John decided to sell the family home and downsize because his wife had been in a qualified long-term care facility for the past two years while receiving Medicaid benefits. With the proceeds, John purchased a condominium for $105,000, which he paid for in full. John was left with $295,000 and was advised by the estate planning attorney to seek counsel from a CFP® practitioner in order to create an income stream for his current needs and plan for the future.

The Planning Process

After meeting with John, a few red flags were raised in the data gathering phase and the following questions needed special attention:

  • Will the proceeds from the sale of the home affect Susan’s Medicaid eligibility?
  • Would any of the proceeds from the sale of the home be taxable?
  • Can he file as married for 2014 and obtain the $500,000 exemption even with his wife living away from the home?

The first step was to confirm that the proceeds from the sale of the home would not impact the amount of the Medicaid benefit Susan receives. This was incredibly important. If the funds from the sale had to be used to pay for care, the money would be depleted due to healthcare costs and John would be left with nothing. While there were many moving parts in the case, a Medicaid expert provided the following opinion: If a spouse has been on Medicaid for more than one year, living in a facility, and the home is not in joint ownership, then the asset will not count for the community spouse (John). Before the sale of the home, John had changed the title of the home to sole ownership and the proceeds were made payable to him which were then deposited into an account bearing his name only.

The second step was to evaluate the proceeds from a tax perspective. John was concerned that he would need to earmark a portion of the funds in order to pay capital gains tax. The capital gains exemption is $250,000 for an individual and $500,000 for a married couple filing jointly, provided that the owner has lived in the home for 2 out of the past 5 years. Both John and Susan lived in the home for the required amount of time, but it is important to note that there is an exception had Susan been away from the home longer. An individual is considered to live in their home during any time within the 5-year period that they own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in their condition. This IRS exception will also allow John to file as a married couple for 2014 and claim the exemption of $500,000, resulting in no capital gains tax owed.

As you can imagine, John was incredibly relieved to learn all of this information and was thankful that his financial life was in the hands of a trusted source. The final step was to create a portfolio that matches John’s risk tolerance and can provide a source of income for years to come.

The advisors at Wisdom Wealth Strategies go to great lengths to evaluate every possible planning situation and outcome. We also value team work and consult with other professional advisers when analyzing solutions. For example, in this, case at least three professionals worked together to achieve the best result. Clients are often overwhelmed with the details and we are always here to walk you through each step of the planning process.

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