The Greatest Financial Risk for Seniors: Paying for
Long-Term Care – Part IX (Protecting the Home cont’d)
Last month’s article concerned the advantages of protecting your house not by transferring the entire house out of your name, but rather by retaining a “life estate” for yourself and transferring only a “remainder interest” in the house. Doing this will protect your house while not affecting your standard of living; it will not expose your house to the risk of being sold because of things that might happen to your children (such as debt, divorce, disability, or death); and it will preserve a potential income-tax advantage for your children when the house is sold after your death.
This month’s article continues this discussion with a list of the advantages of transferring the “remainder interest” into an irrevocable trust rather than to your children directly.
Question: If the remainder interest in my house is held in an “irrevocable” trust, does that mean the house is locked up in the trust and so can’t be sold during my lifetime?
Answer: No, your house can be sold at any time, either during your lifetime or after your death, just as if you had not made this transfer. The only additional requirement would be that the trustee of your trust (typically one of your children) would need to sign the deed along with you (and your spouse if you are married). You sign the deed to convey your retained “life estate” interest, and the trustee signs to convey the “remainder interest.”
Question: Even so, wouldn’t it be simpler not to bother with an “irrevocable trust” at all and just have the children own the remainder interest?
Answer: No, just the opposite would be the case. Let’s use an example:
Suppose John and Mary Smith want to protect their house from a potential Medicaid Death Tax but they don’t want to use an irrevocable trust. So they transfer a remainder interest in their house directly to their four children: Roger, Alice, Tom, and Nancy.
Since John and Mary have retained a “life estate” for themselves, they get all of the advantages discussed in the prior articles in this series. But here are some of the problems that can arise when the house is later sold because John and Mary did not use an irrevocable trust.
But there are potentially more serious difficulties:
But suppose John died but the house was sold during Mary’s lifetime. Because Mary owns the life estate and is still living, there would be no inheritance tax to pay. But there will probably be capital gains tax for the children to pay. Suppose John and Mary purchased this house 40 years ago for $20,000 and that this is their “cost basis” in the house, and after John’s death it sold for $140,000. The sale price ($140,000) less Mary’s cost basis ($20,000) is $120,000 of “capital gains” and is income to Mary and her children.
Now, the point of this entire discussion is that all of these potential problems could have been avoided if John and Mary had transferred the remainder interest in their house into an irrevocable trust rather than directly to their children.
Next month’s article will conclude this series on protecting the house with a discussion of the advantages of having the “remainder interest” in your house go into an irrevocable-trust if you later want to sell your house and purchase another house.
Note: Working with the long-term care system we have in this country, seniors and their families need to understand that despite the restrictions in the Medicaid law, it is almost never too late to protect part or your remaining assets, even when facing an immediate crisis and with no advance planning. Whether you are 75 years old and living in your own home, or have an 85-year-old spouse in a nursing home, there are steps you can be taking now to preserve part – and often a very significant part – of your life savings otherwise at risk of being spent on your nursing care. But it is more true than ever that “time works against you.” Every day of delay in a crisis can result in $275 or more of irretrievable loss, so it is important to contact a knowledgeable and experienced elder law attorney for advice sooner rather than later.
Kemp Scales is now retired, but elder-law attorney Schellart Los continues to serve clients throughout western Pennsylvania from offices in Erie and Titusville. She can be reached toll-free at (888) 827-2788 or by e-mail at firstname.lastname@example.org. The Law Offices of Schellart Joyce, LLC has an Internet presence at www.losscaleselderlaw.com.