“How can I protect my home from future long term care costs?”
“Can I give my house to my kids?”
“Can I sell my house to my child for $1?”
These are questions that we are asked on a daily basis. For many clients, their home is their greatest asset, not to mention it is where they have raised their children and is the place their family calls home. Naturally, people want to protect this treasured asset from long term care costs. But, how?
By way of background, there are two primary ways to pay for long term care costs. First, you might come out of pocket and write a check each month to the assisted living or nursing home facility to pay for care costs. In the alternative, you might try to qualify for Medicaid benefits to help pay for such care costs. Medicaid is a federal program, administered by the states. It is, essentially, a poverty program. A person cannot have assets in excess of $2,000 and qualify for Medicaid benefits.
Additionally, Medicaid has a five (5) year look-back and imposes a penalty on all gifts made within five (5) years of an application for benefits (with limited exceptions). A gift is any transfer for less than fair market value consideration. Thus, transferring your residence to your children to reduce your assets to below $2,000 will result in a penalty if the transfer occurs within five (5) years of a Medicaid application. A Medicaid penalty is a period of time after the Medicaid applicant’s assets are reduced to below the $2,000 threshold, during which Medicaid will not help pay for care costs. The penalty period is calculated by dividing the fair market value of the asset transferred by the Medicaid penalty divisor (currently, a daily rate of $351.84). The resulting number equates to the number of days, prospectively, that benefits will not be granted.
For example, assume that Mom gifted her home (valued at $150,000) to Daughter in 2017. In 2019, Mom is otherwise eligible for Medicaid benefits (i.e., her assets are valued at less than $2,000) and she applies for benefits. In such a case, Medicaid will impose a penalty because of the gift of the house to Daughter within five (5) years of the application for Medicaid benefits. Because the house was worth $150,000 when it was gifted in 2017, the penalty period imposed by Medicaid would be approximately 426 days ($150,000 / $351.84, the current daily rate penalty divisor). Thus, Mom would be out of money and unable to receive Medicaid benefits for 426 days. That would be a hardship for any family, for sure.
So, what can you do?? The simplest answer is this: BE PROACTIVE. Don’t wait until a crisis to try and protect your home. Five (5) years is a long and potentially unforgiving period of time. We need to consider protections for your house before your health is compromised.
But, what we (almost) never recommend is to transfer your home outright to your children. Why not, you might ask. Your children may be wonderful, accomplished, trustworthy, happily married adults. Why not entrust your home to them? Because you never know. You never know when a seemingly happily married child might file for divorce. You never know when a seemingly accomplished and financially secure child runs into creditor issues or gets sued. You never know when a child may pass away unexpectedly. We all hope these scenarios never happen to our families, but we never know. If a child of yours is holding an interest in your home and anyone of these undesirable scenarios occurs, suddenly your home (which is no longer yours) is at risk.
In summary, we are telling you to be proactive; we are warning you about the formidable five (5) year look-back; and, we are telling you not to give your home away. Then, what options remain? Life Estates and Use and Occupancy deeds. With both life estate and use and occupancy deeds, we still must be proactive and mindful of the five (5) year Medicaid look-back. We cannot transfer a residence, subject to a life estate or a retained right to use and occupy the property, and still qualify for benefits within five (5) years without a penalty being assessed.
With a life estate, the parent retains all rights to the property for the duration of his/her lifetime. During the parent’s lifetime, the parent is responsible for all expenses relative to the property (i.e., utilities, taxes, insurances, routine maintenance, etc.), whether or not they are residing in the home. At the parent’s death, the property automatically passes to the children (or, to a trust) and the full value of the property is included in the parent’s estate. This is generally desirable because the children then receive the property with a “stepped-up” cost basis at the parent’s death. If the property has appreciated over the years (as is often the case), a significant capital gains tax is then eliminated or, at least, significantly reduced. If the property is sold during the parent’s lifetime with a life estate deed, the sale proceeds will be divided and distributed between the parent and the children (or their trust), in percentages based upon the parent’s life expectancy (as determined by Social Security Administration tables). This may not be desirable for two reasons. First, if the home is being sold during the parent’s lifetime, it often means that the parent is moving into an institutionalized care setting. If the parent receives a portion of the sale proceeds, those funds will then likely be spent to pay for long term care costs. Next, if the home is sold and the children (or, a trust) receive a portion of the proceeds as the “remainder beneficiaries”, the portion of the proceeds distributable to the children (or, their trust) would trigger a capital gains tax. If, however, the property has not greatly appreciated, this may not be a significant issue.
With use and occupancy deed, the parent retains the right to use and occupy the property but, if the parent ceases to reside in and use the property, the parent’s interest therein lapses. During the period that the parent is using and occupying the property, he/she is responsible for all expenses relative to the property (i.e., utilities, taxes, insurances, routine maintenance, etc.). If the parent vacates the property, whether because of death, a move into an institutionalized care setting, or any other reason, their interest in the property will cease. Thus, if the property is sold during the parent’s lifetime, no portion of the proceeds will pass to the parent. This is often both good news and bad news. Good news because no portion of the proceeds will pass to the parent and, therefore, no portion will be available to pay for the parent’s long term care costs. But, it is also bad news because if the property has appreciated in value and all of the proceeds pass to the children, a significant capital gains tax is likely to result. Likewise, at the parent’s death, the property may not be included in the parent’s estate and, therefore, the children would not inherit the property with a stepped-up cost basis. Accordingly, when the children subsequently sell the property the children could have a significant capital gains tax. Many of the shortcomings of a use and occupancy deed can be remedied when accompanied by a particular type of Grantor Trust. When we use such a Trust in connection with use and occupancy deed, we can cause the property to be taxed (both during life and at death) to the parent and, therefore, the capital gains and step-up issues can be resolved.
In short, how to protect your home from long term care costs is both an important and complex question. For more information about how we might be able to help you protect your home, contact us online or give us a call to schedule a consultation.