The Greatest Financial Risk for Seniors: Paying for
Long-Term Care – Part X (Protecting the Home cont’d)
The previous four articles in this series concerned how to protect your house from the risk of having to be sold and all the proceeds spent down if you later needed long-term nursing care. I thought at this point it would be helpful to summarize the discussion about protecting your house, as well as pointing out the advantages of doing this sooner rather than later.
During your lifetime your residence remains an exempt asset for Medicaid purposes, but it can be subject to an “estate recovery” claim by the Pennsylvania Department of Human Services (DHS) if it ends up in your “probate estate” at your death. Your house can be protected from this risk by transferring a “remainder interest” in it into an irrevocable trust. Making this transfer insures that your house will not end up in your “probate estate” and so will not have to be sold to reimburse DHS for any long-term care Medicaid payments you received.
And unlike financial assets, your house is protected without your having to give up any possession or control. For all practical purposes your house would remain yours just as it is now – you would continue paying the insurance, taxes and maintenance costs, but you would retain the right of exclusive possession and enjoyment as long as you lived, without any risk of anything that might happen to your children (death, divorce, disability, bankruptcy, etc.).
Finally, this way of protecting your house preserves the “step-up in basis” to your children. If your house has appreciated in value (that is, it is worth more now than what you originally paid for it plus later capital improvements), and if you name your children or grandchildren as the trust beneficiaries at your death, they could be reducing, perhaps significantly, the total taxes they would otherwise owe if you had transferred the property to them directly. While Pennsylvania inheritance tax would be owed on the entire house value at your death (or, for a married couple, at the death of the second spouse), paying that tax (at 4.5%) would eliminate the built-in capital gains (which are typically taxed at 15%) when the children sold the house. (However, it’s important to keep things in perspective. The reason for doing this at all is not to avoid a 4.5% inheritance tax or even a 15% capital gains tax, but to protect your house from a potential 100% “Medicaid death tax.”)
If you want to protect your house from this risk, there are a number advantages of doing this now rather than later:
It starts a five-year clock running now so that if you did not need long-term nursing care for five years after signing the deed, your house would be fully protected without creating any delay in your Medicaid eligibility (which means more of your remaining assets could be protected if you needed such care in the future).
If you did need long-term nursing care in the next five years, by retaining a life estate and therefore transferring only the “remainder interest” in your house, you would have reduced (perhaps substantially) the amount of the gift you made for Medicaid purposes and thus created a shorter (perhaps much shorter) period of ineligibility than if you transferred the entire interest in the property, meaning less money (perhaps much less money) having to be paid to the nursing home.
By making this transfer now you would also be creating a shorter period of ineligibility than if you waited, because as you get older the value of your life estate decreases, which means the size of the remainder interest – and, thus, the gift – increases. (For example, for someone aged 65, his or her life estate represents about 68% of the house value; at age 76, about 50%; at age 82, about 40%; etc.) Thus waiting until later to do this would mean a longer period of time that someone would have to pay privately for your nursing home care if you needed such care within five years after signing the deed.
If after making this transfer your house was sold during your lifetime, the portion of the sales proceeds representing your “life estate” interest would go to you, but the remaining proceeds would stay in the trust and thus be protected from the risk of having to be spent on your nursing home care. (This means that every year that passes after you made the transfer would increase the amount that had been protected without increasing the ineligibility period.) At the same time none of the sale proceeds on your residence – including the portion in the trust – would be subject to capital gains tax if it had been your principal residence for at least two of the five years prior to the date of the sale.
Note: If after selling your house you wanted to buy new house better suited to your situation, all of the proceeds from you prior house sale would be available for buying the new house. You would purchase a “life estate” in the new house using the money you received from the sale of your other house, while your trustee would purchase the “remainder interest” using the trust money from the previous sale. In this way your new house would be immediately protected – that is, there would have been no new gift, and so no new 5-year clock running.
If your house was not sold during your lifetime, then all of it would have been protected with either a reduced period of ineligibility or, after five years, no period of ineligibility at all.
Because you would be retaining a life estate in your house, any money you spent on it – other than capital improvements – would not be a gift for Medicaid purposes. So, for example, putting on a new roof, replacing windows, painting or siding the house – none of this would create any ineligibility period for Medicaid purposes. (However, if you added a new room, that would not be merely a lifetime maintenance cost but a capital investment increasing the long-term value of the property for your beneficiaries down the road and so part of the cost would probably be treated as a gift if done within five years prior to filing a Medicaid application.)
Finally, making this transfer now lets you take advantage of the five-year look-back currently available in the Medicaid law. It is impossible to predict how the Medicaid law will change in the future, or when such changes will occur. But it is almost certain that changes will occur in the future, and that the changes (such as increasing the look-back period) will be designed to make it more difficult for you to protect your assets. (For example, the change in the Medicaid law in 2006, among other things, increased the look-back period from 36 to 60 months; however, the change only applied to transfers made after the new law went into effect on February 8, 2006. So those who had made transfers before that date retained the advantage of the shorter period, even if they applied for Medicaid after the change went into effect.)
This article concludes our 5-part series on Protecting the Family Home. The next article in this series will begin a discussion of the “Medicaid Gifting Rules.”
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: Contrary to what almost everyone believes, if you or a family member has been admitted to a nursing home, it is NOT too late to protect assets. The Medicaid laws give seniors the option to protect a significant portion of their life savings, even when facing an immediate crisis, with no advance planning. However, “time works against you” when planning for long-term care; every day of delay in a crisis can result in $200 to $300 or more of irretrievable loss, so it is important that families who have a spouse, parent or other loved one needing long-term nursing care contact a knowledgeable and experienced elder law attorney for advice as soon as possible.
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. Los Scales Elder Law, LLC has an Internet presence at www.losscaleselderlaw.com.