Asset Protection Planning for the Home
Medicaid Eligibility
If you require long term custodial care in a nursing facility, your Home would be considered an available resource for purposes of Medicaid eligibility unless some exception under the law applies (see below). Hence, unless an exception applies, you would be ineligible for nursing home care under Medicaid.
A "Homestead" is the primary residence occupied by a Medicaid applicant or her/his spouse; minor, certified blind or certified disabled child; or her/his dependent relatives. A "Homestead" is an exempt resource for purposes of Medicaid eligibility.
Medicaid Eligibility Rules
All transfers, including the transfer of your Home, are currently subject to a “look-back period” from the time of application for Medicaid benefits of sixty (60) months with no cap on the period of ineligibility for purposes of Medicaid eligibility as to long term nursing home care. These look-back periods were modified by the Deficit Reduction Act of 2005 (DRA). As of February, 2009, the look back period for application purposes only will begin to incrementally increase to sixty months.
The period of ineligibility for nursing home services under Medicaid is equal to the uncompensated value of the resource transferred divided by the average regional monthly cost of a nursing home to a private pay patient. For example, if a Long Island Home was transferred on or after January 1, 2008, the rate would be $10,555 per month. However, while the period of ineligibility is still calculated in the same manner, the DRA modified when the actual period of ineligibility will begin to run which is now only when you are receiving long term care services and are “otherwise eligible” financially. This remains a possibility for a period of five years (sixty months) from the month of the transfer.
After the passage of the sixty months, this transfer would protect the residence from being counted as an available asset as to Medicaid eligibility and from a Medicaid claim for reimbursement in the event you required Medicaid.
An exempt "Homestead" can be transferred without penalty to a spouse; a minor or disabled child; an adult child who has resided with the parent for at least two years prior to the transfer and has been a caregiver; or a brother or sister of the owner who has lived with the owner for at least one year prior to the transfer and who has an "equity interest" in the home.
Transfer of Home with Retained Life Estate
One planning alternative is for you to transfer your residence to your children subject to your retaining a life estate which would give you the right to live in the residence for your lifetime.
A transfer of the residence with a retained life estate will be subject to the sixty month look-back period with no cap on the period of ineligibility for purposes of Medicaid nursing home care.
The period of ineligibility for nursing home services under Medicaid is equal to the uncompensated value of the resource (the value of the residence less the value of the retained life estate) transferred divided by the average regional monthly cost of a nursing home to a private pay patient. This will result in a shorter transfer penalty than if the transfer were outright.
Will I have to pay gift taxes?
You will need to acquire an appraisal of the residence valued as of the date of transfer. The value of the gift is equal to the fair market value of the residence.
You will have to file Federal gift tax returns on or before April 15 of next year. There should be no Federal gift taxes due because each individual has a $1,000,000 lifetime gift tax credit equivalent.
Will I lose my real estate tax exemptions?
Please note that an unrestricted life estate will not adversely affect your continuing eligibility for the Veteran's, School Tax Relief (STAR) or Senior Citizen's exemption, but a restricted life estate would.
Can I sell the Home?
If you sell the residence in the future, you would need the consent of your children. The proceeds would then be distributed partly to you as the life tenant and partly to the children as remainderpersons.
The transfer may adversely affect your ability to maximize your capital gains tax exclusion of $250,000 ($500,000 for a married couple) on the gain from the sale of the residence.
If the residence were sold while you were residing in a Nursing Home, then the sale proceeds may adversely affect your Medicaid eligibility. An alternative to selling the residence would be to rent the residence to a third party. Please note that the net rental income would be part of your Medicaid budget.
What happens in the future?
Upon your demise, the fair market value of the residence will be included in your estate for Federal and New York State estate tax purposes. Estate tax returns may be required and taxes may be owed. The children would own the entire interest in the residence automatically - by operation of law. The residence would not be subject to a probate proceeding.
Also, this transfer would result in your children receiving a “step-up in basis” for income tax purposes upon your demise which will minimize any income taxes on the subsequent sale of the residence after your demise.
Transfer of Home to an Irrevocable Trust
Placing your Home into the trust will be subject to the same sixty month look-back period for purposes of Medicaid eligibility.
Will I have to pay gift taxes?
The transfer of the residence is not a taxable gift because the transfer is deemed to be an incomplete gift; however, Federal gift tax returns must be filed.
Can I sell the Home?
If the Home is sold during your life, the sale proceeds would be held by the Trust with no effect on Medicaid eligibility after the expiration of the transfer penalty period.
The transfer should not adversely affect your ability to maximize your exclusion of $250,000 on the gain from the sale.
Will I lose my real estate tax exemptions?
Depending upon the Trust language, the transfer may affect your eligibility for a real estate veteran's exemption or senior citizens real estate tax reduction, if applicable. However, the use of a life estate deed in conjunction with this Trust will minimize this possibility.
What happens in the future?
Upon your demise, the fair market value of the residence will be included in your estate for Federal and New York State estate tax purposes. Estate tax returns may be required and taxes may be owed. The children would be able to sell the Home from the Trust or transfer it to themselves as the Trust’s beneficiaries. The residence would not be subject to a probate proceeding.
Which Asset Protection strategy is better?
What are the advantages of an Irrevocable Trust versus a Retained Life Estate:
A. The transfer with a retained life estate will result in a shorter Medicaid transfer penalty period than a transfer to a Trust. (advantage—life estate)
B. The transfer to a Trust is an incomplete gift for gift tax purposes, unlike a transfer with a retained life estate. (possible advantage—trust)
C. In either option, the residence will still be considered part of your estate subject to estate taxation and will receive a step up in basis for income tax purposes if the residence is sold subsequent to your demise. (no advantage).
D. If the residence is sold while you are in a nursing home, then the sale proceeds would NOT be an available resource for purposes of Medicaid eligibility, if held in the Trust. A portion of the net sale proceeds would be available with a retained life estate. (advantage—trust)
E. If the residence is sold in the Trust, you may qualify for the $250,000 exclusion of capital gain. There is currently no regulations or case law on point. With a retained unrestricted life estate, a portion of the sale proceeds may qualify for the $250,000 exclusion as long as the other requirements of the Internal Revenue Code are met. (advantage-trust)
F. There is asset protection in the Trust from creditor claims of the children, unlike the retained life estate. (advantage—trust)
G. The period of Medicaid ineligibility for nursing home care may be greater for a Trust than a life estate transfer depending upon the value of the gift. (possible advantage—life estate)
H. Legal fees are typically less for a deed transfer with a life estate than a trust. (advantage—life estate)
This Memorandum is based on current law and is for informational purposes only. It is important that you discuss all legal options and consequences with a qualified elder law attorney prior to any action. Should you wish to discuss your situation with us, please call (631) 424-2800 for a consultation. For additional Memoranda, please call or visit our website at www.elderlaw.pro.
