With the cost of long-term care (LTC) skyrocketing, you may be concerned about your (or your elderly parents’) ability to pay for lengthy stays in assisted living and/or a nursing home. Such care can be massively expensive, with the potential to overwhelm even the well-off.
Because neither traditional health insurance or Medicare will pay for LTC, some people are looking to Medicaid to help cover this cost. To become eligible for Medicaid, however, you must first exhaust nearly every penny of your savings. Given this, you may have heard that if you transfer your house to your adult children, you can avoid selling the home if you need to qualify for Medicaid. You may think transferring ownership of the house will help your eligibility for benefits and that this strategy is easier and less expensive than handling your home (and other assets) through estate planning. However, this tactic is a big mistake on several levels. It can not only delay—or even disqualify—your Medicaid eligibility, it can also lead to numerous other problems. Medicaid Changes In February 2006, Congress passed the Deficit Reduction Act (DRA), which included a number of provisions aimed at reducing Medicaid abuse. One of these was a five-year “look-back” period for eligibility.
This means that before you can qualify for Medicaid, your finances will be reviewed for any “uncompensated transfers” of your assets within the five years preceding your application. If such transfers are discovered, it can result in a penalty period that will delay your eligibility. For every $6,422 worth of uncompensated transfers made within this five-year window, your Medicaid benefits will be withheld for one month. Any transfers made beyond that five-year period will not be penalized.
So, if you transfer your house to your children and then need LTC within five years, it may significantly delay your qualification for Medicaid benefits—and possibly prevent you from ever qualifying. Rather than taking such a risk, consult with us to discuss safer and more efficient options to help cover the rising cost of LTC, such as long-term care insurance.
A potentially huge tax burden
Another drawback to transferring ownership of your home is the potential tax liability for your child. If you’re elderly, you may have owned your house for a long time, and it’s possible that its value has dramatically increased. This might lead you to believe that by transferring your home to your child, he or she can make a windfall by selling it. Unfortunately, if you do that, she or he will have to pay capital gains tax on the difference between your home’s value when you purchased it and your home’s selling price at the time it’s sold by your child. Depending on the home’s value, these taxes can be astronomical.
In contrast, by transferring your home at the time of your death, your child will receive what’s known as a “step-up in basis.” It’s one of the only benefits of death, and it allows your child to pay capital gains taxes when he or she sells your home, based only on the difference between the value of the home at the time of inheritance and its sales price, rather than paying taxes based on the home’s value at the time you bought it. We can help you choose the most advantageous estate-planning strategy to minimize your beneficiaries’ tax liability and ensure they get the most out of their inheritance.
Debt, Divorce, Disability, and Death
There are numerous other reasons why transferring ownership of your house to your child is a bad idea. If your child has significant debts, his or her creditors can make claims against the property to recoup what they’re owed, potentially forcing your child to sell the home to pay those debts.
Divorce is another problematic issue. If your child goes through a divorce while the house is in his or her name, the home may be considered marital property. Depending on the outcome of the divorce, this may force your child to sell the home or pay a share of its value to an ex-spouse. The disability or death of your child can also lead to trouble. If your child becomes disabled and seeks Medicaid or other government benefits, having the home in his or her name could compromise eligibility, just like it would your own. And if your child dies before you and has ownership of the house, the property could be considered part of your child’s estate. It could then be passed on to your child’s heirs, creating a problem for you.
No substitute for proper estate planning Given these potential problems, transferring ownership of your home to your children as a means of “poor-man’s estate planning” is almost never a good idea. Instead, with us as your counsel, we can help you find better ways to qualify for Medicaid and other benefits. We’ll look for ways to offset the hefty price tag of long-term care and also keep your family out of court and out of conflict, in the event of your incapacity or death. We offer an array of estate planning strategies to protect all of your assets, while also enabling you to better afford whatever long-term healthcare services you might require. Contact us today to learn more.