If you’re thinking about
it because you want to make sure it stays in the family or you have some
concerns about Medicaid in the future, be careful. There can be serious
consequences if not executed just right.
By Tracy
Craig, Fellow, ACTEC, AEP®, Partner and Chair of Trusts and Estates
Group Mirick O'Connel June 12, 2018
A house is typically one
of the most valuable assets someone owns, both financially and sentimentally.
It makes sense then that, out of love and generosity, many parents want to give
their houses to their children during their lives or pass them down as an
inheritance. It’s difficult to imagine that giving your child your family home
could backfire, but it might — especially if you do not understand all the
pitfalls and benefits.
Passing on a home can be a
complicated matter, and doing it at the wrong time, in the wrong way or for the
wrong reasons can have significant consequences for both parents and children.
A primary reason someone
might think about transferring their house to a family member has to do with
Medicaid. Nursing home costs continue to rise, and many people want to be able
to qualify for government benefits. In addition, they don’t want to worry that
their home may be forced to be sold after they pass away to cover the cost of
the benefits they received through a process called estate recovery.
Estate
Recovery: Why is Your Family Home Vulnerable?
To begin, it is important
to understand that Medicaid is different from Medicare (even though sometimes
people mistakenly believe the two are interchangeable). Medicare is a federal
entitlement program that provides health insurance for people over the age of
65, regardless of how much money they have. Medicaid, on the other hand, is a
federal health insurance program for the elderly, disabled and poor that, among
other things, will pay for long-term skilled nursing home care for individuals
in need.
Generally speaking, people
must be below certain quite restrictive income and asset limits to qualify for
Medicaid. In simple terms, once most of your assets are gone, Medicaid will
kick in to pay for nursing home care. However, a primary residence with
$572,000 of equity in 2018 (or up to $828,000 of equity in certain states that
opted for an increased amount available under federal law) is considered a
non-countable asset. This means that it is possible to own a home and still
qualify for the government to pay for nursing home care under Medicaid.
Upon the death of a
Medicaid recipient, each state has the right to recover from the deceased
person's estate the amount paid for their care. Because the home is one of the
only assets that people are allowed to own and still receive Medicaid benefits,
the right to recover benefits from the estate (typically from the sale of the
house) is what people mean when they've heard that the state will take the
home. (Note that no recovery efforts can be made until after the death of the
recipient’s spouse.)
Those worried about estate
recovery sometimes consider giving the home away prior to the time they believe
they will need nursing home care. But misunderstandings about Medicaid’s
complex laws can result in serious consequences.
Beware
of the Look Back Period
Before transferring any assets,
it’s crucial to understand about the look back period and how it affects
Medicaid eligibility. When you apply for Medicaid, any gifts or asset transfers
made within five years are subject to penalties. In other words, giving away
assets can disqualify you from receiving Medicaid.
Under the current rules,
Medicaid benefits are denied if people have given away assets within 60 months
of the date of application. This critical time is known as the "look back
period." Consequently, it is important to trust that you are healthy
enough to stay out of a nursing home for at least five years from when you give
away your house (or any other assets). Planning must be done long before any
need arises.
But keep in mind, the look
back period isn’t the only thing to consider if you want to gift away your
family home. The way you set up the transfer of your property is extremely
important and also fraught with unforeseen consequences — whether it’s an
outright deed, a deed with life estate, or to an irrevocable trust. Here’s a
brief review of the pros and cons of each:
·
Outright Deed: Giving away your home can be as simple as executing a deed
transferring ownership to someone else, such as your child. This is
straight-forward and relatively inexpensive to accomplish. However, if the
person to whom you gift your house gets sued, divorced or declares bankruptcy,
the house can be lost. And, if you arranged to continue to live in the house,
that right could be lost as well. Another potential problem is that the people
you give away your house to could disagree over how to manage the house, and
family fights could ensue.
·
Deed with Life Estate: You can also execute a deed
transferring ownership, but if you include a life estate in the deed, your
right to live in the house for the rest of your life cannot be taken away.
While a life estate can solve some of the above issues, the part of the house
you've given away — known as the remainder interest — is still vulnerable to
creditors and divorce, and to fights among the new owners. In addition, in some
states, the life estate may be subject to estate recovery.
·
Irrevocable Trust: You can also transfer your house
to an irrevocable trust. An irrevocable trust provides protection for the house
from the creditors and divorces of the beneficiaries of the trust (other than
you — and in some states you can be a limited beneficiary of the trust). In
addition, the trust can dictate how the house will be dealt with after you
pass. For example, should one child have the right to live there for a period
of time? Should any child have the right of first refusal to buy the house?
Should the house be sold to a third party? These provisions can ensure that
fights among your children about what to do with the house after your death are
kept at bay. But while a trust addresses many issues, it is also much more
expensive and complex, easily costing thousands of dollars to implement.
Possible
Tax Downside of Transferring Property to Your Kids
Capital gains taxes are
generally owed when you sell an asset that is worth more than you paid for it.
However, individuals can generally exempt up to $250,000 from capital gains
taxes upon the sale of a primary residence if they occupy the house as their
primary residence for two of the five years prior to the sale. Couples can
generally exempt up to $500,000. So, if your home increases in value you might
not need to pay capital gains taxes when you sell. If you give your house to
your children, and they do not live there as their primary residence, they will
not be eligible for this exemption upon a sale. They would need to pay capital
gains taxes on the increased value. Proper planning can help minimize or
eliminate this result.
Also important is that if
you retain certain ownership rights in your house (such as a life estate or
possibly through an irrevocable trust), then when you die the tax basis of the
house becomes fair market value at death. This is known as the step-up in basis
rule, and it’s important when it comes time for your children to sell the home.
This rule eliminates any capital gains taxes your children might otherwise need
to pay upon the sale of the house after you die.
Needless to say, there are
many things to consider before deciding whether or not to give away your house.
Tax issues and the complex timing rules for Medicaid can make giving away our
house tricky, but with careful thought and planning there are strategies that
make it possible to accomplish your goals.
Should you give away your
home to family members? Because rules can vary from state to state, it makes
sense to consult with a local attorney or estate planning expert before
deciding. That way you can pass along your most valued asset to future
generations in the best way possible and avoid unpleasant consequences.
Estate attorney Tracy Craig is a partner and chair of Mirick O'Connell's Trusts and Estates
Group. She focuses on estate planning, estate administration, prenuptial
agreements, tax-exempt organizations, guardianships and conservatorships and
elder law. Craig is a Fellow of the American College of Trust and Estate
Counsel and an AEP®. She has received an AV® Preeminent Peer Review Rating by
Martindale-Hubbell, the highest rating available for legal ability and
professional ethics.
Comments
are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the
author.
This
article was written by and presents the views of our contributing adviser, not
the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
No comments:
Post a Comment