For many people, the family home is the one asset they have planned to pass on to their children. When faced with the fear of the sky rocketing costs of long-term care in the United States, and the potential need to sell their home in order to pay for care, many ask the question: “how do I protect my house so the nursing home doesn’t take it?”
Although your primary residence is not counted when determining Medicaid eligibility in Pennsylvania, the asset is still considered “at risk” because, generally, if you received Medicaid benefits, the Department of Human Services will try to recover the value of the real estate upon your death through a process called “estate recovery.” Additionally, during your life the ongoing maintenance expenses for the real estate often become too burdensome for a single applicant to continue because of Medicaid’s income and asset limitations.
What can you do now to protect your home so you are not faced with the tough decision of needing to sell your home to pay for your cost of care?
The key is to plan ahead!
The rest of this article will focus on what I consider to be asset protection planning techniques that clients ask about the most; however, it is important to note that there are other techniques not included in this article.
I must preface this article by stating that consulting with an elder law attorney in before implementing one of these planning techniques is imperative. The purpose of this article is to discuss techniques available to elder law attorneys to help protect your home. Each technique must be clearly evaluated against your personal circumstances to be determined whether it is a recommended to utilize the technique in your situation.
Should I gift my house to my children for $1?
Probably the most common question I receive is, “should I just gift my home to my child for $1?” While there are several options that can be utilized to protect your primary residence, including making an outright transfer of the home to your children, there are several disadvantages of an outright transfer, including:
- (i) If you give your home to your children, you no longer have a legal right to live in the house. This means that your children can refuse to allow you to continue living in the home;
- (ii) Upon gifting your home to your children, the home is your children’s asset. This means that if a child gets sued, divorced, dies, or becomes disabled, the home is subject to your child’s creditors;
- (iii) The transfer, despite requiring your child to pay $1 or another reduced amount is considered a gift (unless your child pays you the full fair market value); therefore, a Medicaid transfer penalty period will apply and should you require nursing home care before the expiration of 60 months from the date of the transfer (except for transfers to certain exempt recipients);
- (iv) When your children inherit your real estate upon your death, they receive a stepped-up tax basis. However, where you gift your home to your children during your life there is no stepped-up basis upon death (the recipient receives your cost basis). Additionally, because the house is owned by a child, assuming the child is not also living in the home with you, you risk losing the $250,000 exclusion of capital gains ($500,000 for a married couple);
- (v) When you gift your house to your children you risk the potential loss of property tax exemptions because the home is no longer the owner’s primary residence; and
- (vi) Pennsylvania law provides that children have the responsibility to care for and maintain or financially assist their indigent parent. This is sometimes referred to as “filial support.” Pennsylvania filial support law is often used by nursing homes and other care providers to sue children for debts owed by their parent. This issue often is raised where a parent has gifted to their children.
Should I gift my home to my children, but retain the right to live in my home?
Another technique is to transfer your real estate to your children, but retain the right to live in your home for your lifetime. This is called a life estate deed. Given the disadvantages of gifting the real estate to your children, a better option is to transfer the home while retaining the right to live in the home. This is known as retaining a life estate. A transfer of the home while retaining a life estate will:
- (i) Ensure your right to live in the home during your lifetime;
- (ii) This option will offer some protection from the potential creditors of your children during your lifetime;
- (iii) The Medicaid penalty period is shortened because the penalty is calculated based on the value of the life estate;
- (iv) Your children will still receive the benefit of the step up in cost basis upon death; and
- (v) This option allows you to still qualify for property tax exemptions.
It is important to note, however, that a life estate may adversely affect the $250,000 exclusion of capital gains ($500,000 for a married couple) as to the interest held by the recipient of the property. Additionally, in the event that the property is sold, the value of your life estate would not be protected, and would be counted as an available asset to pay for your care.
Should I transfer my home to a Medicaid asset protection trust?
The final planning technique requires the creation of an irrevocable Medicaid asset protection trust. The irrevocable trust would own your real estate, and thus, your real estate would not be countable for Medicaid eligibility and would be protected from estate recovery if you should ever need Medicaid. However, it is important to understand that in the event that you would sell your home, the proceeds of the sale would be held in trust and would also not be accessible to you, but would be accessible to people that you choose. Those people are called “Lifetime Beneficiaries” and are often one or more children or close relatives.
The benefits of utilizing a Medicaid asset protection trust include:
- (i) You are ensuring your right to live in the home during your lifetime;
- (ii) This option will offer protection from the potential creditors of your children and yourself during your lifetime;
- (iii) Upon the 60-month “lookback period” lapsing, the value of the home is fully protected even in the event of you needing or choosing to sell the property;
- (iv) Upon your death, Medicaid cannot recover against the value of the home through estate recovery;
- (v) Your children will still receive the benefit of the step-up in basis upon your death; and
- (vi) This option allows you to still qualify for property tax exemptions.
Keep in mind that assets in this irrevocable trust will be protected only after a period of 60 months, called the “lookback period.” If transfers were made during that 60-month period, then a transfer penalty, or period of ineligibility, will be assessed by Medicaid.
As you plan for the future, protecting your assets and planning for the possibility of needing long term care is one of the most important steps you can take. Contact OWM Law today to schedule an Elder Law Consultation to discuss how to protect your home from the cost of nursing home care.
This article was written by: Rebecca A. Hobbs, Esquire, CELA