A conversation of your options when trying to secure your home while receiving Medicaid services.
Spending for the high costs of long term care today can be financially devastating. For numerous couples the principal home is their most valuable asset and safeguarding that possession in the occasion one or both partners should require long term care is of primary concern for them as well as their children. Receiving Medicaid in order to spend for those costs will relieve that problem. Medicaid is a joint federal/state program which spends for the medical care costs of individuals with little or no resources. This post will talk about three choices offered to numerous couples who pick to remove the primary house from the resource limitation allowed by Medicaid. The choice regarding the suitable alternative will be assisted by numerous factors such as the transfer’s effect on Medicaid eligibility, gift taxes, expense basis issues, and prospective capital gains tax repercussions.
The first alternative is a straight-out gift transfer of the home. While this choice is fairly easy to accomplish, including a deed transfer and perhaps a present income tax return, the downside might be significant because the transferees (typically the children) would take as their expense basis the moms and dads’ cost basis. To put it simply, when the kids ultimately sell the residence, they may need to pay a big capital gains tax for which they can not declare any exclusion. In addition, the transfer may trigger a gift tax depending upon the value of the residence. Further, the transfer will trigger a penalty duration in the event a Medicaid application is submitted within five (5) years of the transfer (the Medicaid “recall” duration). Finally, the parents may be at the grace of the children as they have actually not kept any ownership rights.
The 2nd alternative is a transfer of the home with a kept life estate. This choice likewise includes a simple deed transfer however includes a statement in the deed booking to the parents the right to the use and tenancy of the house for the remainder of their lifetimes. In this case, the children can not exercise their ownership rights while the life estates exist without the permission of the moms and dads. On the other hand, the parents can not exercise certain ownership rights without the permission of the kids. In addition, because Medicaid permits the value of the kept life estate to be subtracted from the overall value of the residence when identifying the period of ineligibility, this transfer may produce a shorter penalty period than an outright transfer or perhaps a transfer to a trust. Further, considering that the parents keep a life interest in the residence, the children will get a “step-up” in cost basis of the house at the enduring parent’s death. This indicates that when the children eventually sell the residence they may have little or no capital gains tax. This option sounds great unless the problem occurs of selling the house during the term of one or both of the moms and dads’ life estates. Because the moms and dads only own a life interest in the home, not only would they need their children’s approval to 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 individual) could be significantly lessened consequently potentially causing capital gain taxes to be due.
The 3rd alternative, a transfer of the house to an Income Just Trust, likewise called a Medicaid Qualifying Trust, can alleviate the capital gains tax issue. The trust, as long as it is structured effectively, will allow the moms and dads to be taxed from an earnings tax viewpoint as the owners of the trust so that upon a sale of the home, during their lifetimes, their entire capital gain exclusion will be offered to them. Even more, the Income Only Trust will not set off any gift tax concerns since the transfer of the home to the trust will not be identified as a gift. In addition, considering that the moms and dads likewise book a life interest in the house through the trust, their continued use of the house is fairly protected. Once the residence passes at the death of the enduring moms and dad, the children will still get a stepped up cost basis so that when they sell the residence, there would be little or no capital gains tax. Of course, the expenses related to developing a Medicaid Qualifying Trust might be greater than with a straight-out transfer or a transfer with a retained life estate. Likewise in case the parent makes an application for Medicaid within 5 years of the transfer, the entire worth of the residence will be used in figuring out the charge period unlike the deed transfer with a maintained life estate.
The transfer of the residence to an Earnings Only Trust not just provides security of the residence in case long term care is required, however likewise offers earnings and present tax advantages while protecting the moms and dads’ entire capital gains tax exemption. This is a great choice if there is uncertainty as to whether the residence can be retained up until the death of the surviving parent. However, if the need for long term care is more than likely to happen within the five year Medicaid recall duration, a transfer with a maintained life estate and the lowered penalty duration that could result may be the better option. Just like any legal concern, each case should be examined on its individual merits and an attorney familiar with these issues must be consulted in order to choose the very best choice and execute it effectively.