A conversation of your options when attempting to protect your home while receiving Medicaid services.
Spending for the high expenses of long term care today can be financially ravaging. For lots of couples the primary residence is their most valuable asset and protecting that possession in the event one or both partners must require long term care is of primary concern for them along with their children. Qualifying for Medicaid in order to spend for those costs will reduce that problem. Medicaid is a joint federal/state program which spends for the treatment costs of people with little or no resources. This post will discuss 3 options available to numerous couples who choose to remove the principal home from the resource limitation allowed by Medicaid. The decision regarding the appropriate option will be guided by numerous factors such as the transfer’s effect on Medicaid eligibility, present taxes, expense basis problems, and possible capital gains tax repercussions.
The initially option is an outright present transfer of the house. While this alternative is fairly basic to accomplish, involving a deed transfer and potentially a gift tax return, the disadvantage may be considerable because the transferees (typically the children) would take as their expense basis the parents’ cost basis. To put it simply, when the kids eventually offer the residence, they might have to pay a big capital gains tax for which they can not claim any exemption. In addition, the transfer may set off a gift tax depending on the value of the house. Further, the transfer will activate a penalty period in case a Medicaid application is submitted within 5 (5) years of the transfer (the Medicaid “recall” period). The moms and dads may be at the mercy of the children as they have actually not maintained any ownership rights.
The 2nd choice is a transfer of the residence with a maintained life estate. This choice also includes a basic deed transfer but includes a statement in the deed scheduling to the parents the right to the use and occupancy of the residence for the rest of their lifetimes. In this case, the kids can not exercise their ownership rights while the life estates exist without the consent of the moms and dads. Alternatively, the parents can not exercise certain ownership rights without the authorization of the kids. In addition, because Medicaid allows the worth of the kept life estate to be subtracted from the total worth of the home when determining the period of ineligibility, this transfer may produce a shorter penalty period than an outright transfer or even a transfer to a trust. Further, considering that the moms and dads maintain a life interest in the residence, the kids will receive a “step-up” in expense basis of the house at the enduring moms and dad’s death. This means that when the kids ultimately offer the home they might have little or no capital gains tax. This alternative sounds great unless the concern emerges of offering the home during the regard to one or both of the moms and dads’ life estates. Given that the moms and dads just own a life interest in the residence, not only would they require their kids’s grant the sale, however upon the sale the capital gains tax exclusion they would otherwise take pleasure in ($500,000.00 per couple, $250,000.00 per person) might be badly lessened thus potentially causing capital gain taxes to be due.
The 3rd choice, a transfer of the house to an Earnings Just Trust, likewise called a Medicaid Qualifying Trust, can minimize the capital gains tax problem. The trust, as long as it is structured properly, will allow the parents to be taxed from an earnings tax perspective as the owners of the trust so that upon a sale of the home, during their lifetimes, their entire capital gain exemption will be readily available to them. Further, the Earnings Just Trust will not set off any present tax issues since the transfer of the home to the trust will not be defined as a present. In addition, given that the moms and dads also reserve a life interest in the house through the trust, their continued usage of the house is relatively protected. Lastly, once the home passes at the death of the surviving parent, the children will still receive a stepped up cost basis so that when they sell the house, there would be little or no capital gains tax. Of course, the costs related to producing a Medicaid Qualifying Trust may be greater than with a straight-out transfer or a transfer with a retained life estate. In the event the parent applies for Medicaid within 5 years of the transfer, the whole value of the house will be used in identifying the charge period unlike the deed transfer with a retained life estate.
The transfer of the residence to an Earnings Just Trust not only supplies security of the home in the event long term care is needed, but likewise provides income and present tax benefits while preserving the parents’ entire capital gains tax exclusion. This is a good choice if there is unpredictability regarding whether the residence can be kept till the death of the enduring parent. If the requirement for long term care is most likely to happen within the 5 year Medicaid look back duration, a transfer with a kept life estate and the minimized charge period that could result may be the much better option. As with any legal problem, each case must be taken a look at on its private benefits and an attorney familiar with these issues need to be sought advice from in order to select the finest choice and implement it properly.