Long-Term Care – Part VIII (Protecting the Home cont’d)

The Greatest Financial Risk for Seniors: Paying for

Long-Term Care – Part VIII (Protecting the Home cont’d)

Kemp Scales, CELA*

This month’s article continues our discussion of protecting your home from the risk of having to be sold and all of the proceeds spent down if you later needed long-term nursing care.

Last month’s article talked about the advantages of protecting your house by transferring a “remainder interest” into an irrevocable trust while holding back a “life estate” interest for yourself. Doing this protects your house from an “Estate Recovery Claim” – the only claim the Pennsylvania Medicaid office can have against your house – because it insures that your house will not end up in your “probate estate” at your death. It also protects your house during your lifetime from any problems that your children might face (particularly creditor problems), and it does so in a way that does not affect your standard of living.[1]

Here are a couple of other advantages of this way of protecting your house.

  • Creates A Shorter Ineligibility Period. The transfer of a remainder interest is almost always going to be a “gift” for Medicaid purposes. This means that if you need to file a Medicaid application within five years after signing the deed, this transfer needs to be disclosed on the application and you will not be eligible to receive Medicaid long-term care benefits for a period of time.[2]

However, the period of ineligibility for Medicaid will be shorter than if you had transferred your entire house. That’s because the amount of time you will be ineligible for Medicaid is based on the amount you gifted. By retaining a life estate, you held back for yourself part of the value of your home and so t’s only the portion remaining (the “remainder interest”) that is treated as the gift.

An example should help:

  • The period of ineligibility for Medicaid is calculated by dividing the total amount gifted during the look-back period by the average cost of a nursing home in Pennsylvania at the time the Medicaid application is filed. As of 2018, that figure is a little over $10,000 a month.
  • Transferring the entire house. Assuming your house is worth $180,000, if you transferred your entire house then for Medicaid purposes that would be a gift of $180,000.

    • Dividing $180,000 by $10,000 equals 18 months of ineligibility for Medicaid. Because this ineligibility period only begins to run once you are “otherwise eligible for Medicaid” – that is, only after you have spent down your countable assets to a maximum of $8,000 [3] – this means 18 months of nursing home payments not covered by Medicaid.
  • Transferring a Remainder Interest. However, if instead you transferred a “remainder interest” only, the gift would be smaller because you held back a “life estate” interest.

    • The value of your life estate is based on your age at the time of the transfer. For example, if you were age 76 when you signed the deed, your life estate interest would have been half the value of the house, and so in this case the gift would have been $90,000, or 9 months of ineligibility rather than 18. At age 86, your life estate is worth about a third, so the gift would be $120,000, or 12 months of ineligibility. At age 93, your life estate is only about a fourth and the gift $135,000, or 13.5 months of ineligibility.
    • Note that as you get older, your life estate interest decreases, which means the remainder interest – and therefore the amount of the gift – increases. This means that if you want to take steps to protect your home in this fashion, you get more benefit by doing it sooner rather than later.
  • Because every month of ineligibility for Medicaid represents a potential payment of one month of nursing home care (anywhere from $7,000 to over $14,000 in northwest Pennsylvania), reducing the ineligibility period represents a significant potential savings.
  • Potential Tax Savings. Finally, although transferring the house while retaining a life estate will not avoid Pennsylvania Inheritance Tax at the parent’s death, in many cases the children will have less tax to pay overall than if they had received the entire house outright. This probably seems counter-intuitive, so let me explain.

    • Many parents own houses that were purchased (or inherited) decades ago, when house values were much lower than they are now. As a result, they often have a “cost basis” in their house much lower than its current fair market value. If the parent transferred the house outright to one or more children, without retaining a life estate, then as long as the parent lived at least a year after making the gift there would be no Pennsylvania inheritance tax owed on the house at the parent’s death. However, the children would get the house with their parent’s low cost basis (that is, with all of their mother’s built-in capital gains) and so would have to pay income tax on the capital-gains portion of the sales proceeds when the house was sold.
    • If instead the parents held back a life estate and transferred only the remainder interest, then Pennsylvania inheritance tax would be owed on the house at the parent’s death. However, because paying this inheritance tax eliminates all of the build-in capital gains, in many cases the children would end up paying less overall tax.

Again, an example should help. Suppose your mother owns a house worth $100,000 that she purchased in 1963 for $15,000, and since then has put in $25,000 of capital improvements, giving her a “cost basis” of $40,000.

  • If she transfers her entire house to her children, they take her “cost basis” in the house of $40,000. This means that for income-tax purposes, the children are treated as if they had purchased the house for $40,000.

    • If your mother lives at least a year after making this transfer, at her death there would be no Pennsylvania inheritance to pay. Since the inheritance tax rate is 4.5% for transfers to children, that’s an inheritance tax payment of $4,500 ($100,000 fair market value of the house at your mother’s death times 0.045).
    • If the children then sold the house for $100,000, their capital gains would be $60,000 ($100,000 minus $40,000). The capital gains tax rate is typically 15%, so that’s $9,000 of capital gains tax the children would owe the IRS.
  • On the other hand, if your mother had retained a life estate when she transferred her house to her children, then at her death her estate would have to pay the $4,500 Pennsylvania inheritance tax. But by paying that tax the children would get a “step-up” in cost basis in the house to $100,000. This means that for income-tax purposes, the children are treated as if they had purchased the house for $100,000. So if they later sold it for $100,000, they would have no capital gains tax to pay.
  • So in this case, paying $4,500 of inheritance tax eliminated all of the built-in capital gain, and so the children avoided having to pay a $9,000 capital gains tax ($60,000 x 15% = $9,000) when the house was sold and giving them an overall tax savings of $4,500.

However, it’s important to keep things in perspective. The purpose of the asset-protection strategy I have been describing is not to save a 4.5% inheritance tax, or even a 15% capital gains tax, but to avoid the potential 100% Medicaid Death Tax.

The next article in this series will continue this discussion with a list of the advantages of transferring the “remainder interest” into an irrevocable trust rather than to your children.


The content herein is for general informational purposes only and does not constitute legal advice. For specific questions you should consult a qualified elder law attorney.

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 a Certified Elder Law Attorney* who, along with his partner Schellart Los, serves clients throughout western Pennsylvania from offices in Erie and Titusville. They can be reached toll-free at (888) 827-2788 or by e-mail at schelly@losscaleselderlaw.com. Scales Law Offices, LLC has an Internet presence at www.losscaleselderlaw.com.

* Certified as an Elder Law Attorney by the National Elder Law Foundation as authorized by the Pennsylvania Supreme Court.

  1. As with all of my articles, my discussion concerns the law as it currently exists. All laws are subject to change, and this is especially true of public benefit law. Still the home-protection strategy I am discussing in this series of articles has been available to seniors for the 18 years I have been practicing Elder Law.

  2. Note: any gifts you made during the 5-year “look-back period” will not affect your eligibility for Medicaid to cover your prescription drug bills.

  3. If your gross monthly income is more than $2,250, your asset limit is $2,400 (2018 numbers at the time this article went to press).