A conversation of your choices when attempting to secure your home while receiving Medicaid services.
Paying for the high expenses of long term care today can be economically ravaging. For lots of couples the principal residence is their most important possession and securing that property in the event one or both partners should require long term care is of main issue for them in addition to their children. Certifying for Medicaid in order to pay for those costs will minimize that burden. Medicaid is a joint federal/state program which pays for the medical care expenses of individuals with little or no resources. This article will discuss 3 choices offered to numerous couples who pick to remove the principal house from the resource limitation enabled by Medicaid. The choice as to the appropriate choice will be directed by a number of factors such as the transfer’s result on Medicaid eligibility, present taxes, expense basis problems, and possible capital gains tax consequences.
The initially choice is a straight-out gift transfer of the house. While this choice is relatively simple to achieve, involving a deed transfer and perhaps a present income tax return, the downside might be significant due to the fact that the transferees (generally the children) would take as their cost basis the parents’ cost basis. In other words, when the children ultimately offer the home, they may need to pay a substantial capital gains tax for which they can not claim any exclusion. In addition, the transfer might trigger a present tax depending on the value of the house. Further, the transfer will set off a charge period in case a Medicaid application is filed within five (5) years of the transfer (the Medicaid “recall” period). The parents may be at the grace of the children as they have not maintained any ownership rights.
The second choice is a transfer of the residence with a kept life estate. This alternative likewise involves an easy deed transfer however consists of a statement in the deed booking to the moms and dads the right to the usage and occupancy of the home for the rest of their life times. In this case, the kids can not exercise their ownership rights while the life estates exist without the consent of the moms and dads. Alternatively, the moms and dads can not exercise certain ownership rights without the permission of the children. In addition, because Medicaid permits the worth of the kept life estate to be subtracted from the overall value of the residence when identifying the period of ineligibility, this transfer might produce a shorter penalty period than a straight-out transfer and even a transfer to a trust. Further, considering that the parents maintain a life interest in the residence, the children will get a “step-up” in expense basis of the home at the making it through moms and dad’s death. This means that when the kids ultimately offer the residence they may have little or no capital gains tax. This choice sounds excellent unless the concern arises of offering the residence during the term of one or both of the moms and dads’ life estates. Considering that the parents only own a life interest in the home, not just would they require their kids’s permission to the sale, but upon the sale the capital gains tax exclusion they would otherwise delight in ($500,000.00 per couple, $250,000.00 per person) could be seriously lessened consequently possibly triggering capital gain taxes to be due.
The third choice, a transfer of the house to an Income Only Trust, likewise called a Medicaid Qualifying Trust, can ease the capital gains tax problem. The trust, as long as it is structured properly, 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, throughout their life times, their entire capital gain exclusion will be available to them. Even more, the Earnings Only Trust will not set off any gift tax issues since the transfer of the residence to the trust will not be defined as a present. In addition, because the parents likewise schedule a life interest in the home through the trust, their continued use of the residence is relatively safe and secure. Once the house passes at the death of the making it through parent, the kids will still receive a stepped up cost basis so that when they sell the house, there would be little or no capital gains tax. Of course, the costs related to producing a Medicaid Qualifying Trust might be greater than with an outright transfer or a transfer with a maintained life estate. In the occasion the moms and dad uses for Medicaid within 5 years of the transfer, the entire worth of the home will be utilized in figuring out the penalty duration unlike the deed transfer with a kept life estate.
The transfer of the home to an Earnings Only Trust not just supplies protection of the house in the event long term care is necessary, however likewise provides earnings and gift tax benefits while maintaining the parents’ entire capital gains tax exemption. This is a good choice if there is unpredictability regarding whether the residence can be kept until the death of the enduring parent. Nevertheless, if the requirement for long term care is more than likely to take place within the five year Medicaid recall duration, a transfer with a kept life estate and the minimized charge duration that could result may be the much better choice. Similar to any legal problem, each case should be taken a look at on its individual merits and an attorney acquainted with these concerns should be spoken with in order to select the finest choice and implement it appropriately.