Americans born in the year 1900 could expect to live about 49 years. Post-war baby boomers of the late 1940's will live on average to their late 60's, and babies born today have a life expectancy of about 79 years.
In light of these statistics and the fact that the cost of long-term care (LTC) is 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. This kind of care can be massively expensive, with the potential to overwhelm even the well-off.
Because neither traditional health insurance nor 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.
Whenever whole groups of people start dealing with a problem like this, you can be sure that poor-man’s estate planning solutions will start popping up.
In this arena, a disturbing idea being batted around by well-meaning individuals is the transfer of the family home to another individual, usually a child. The idea is that if you transfer your house to your adult children, you can avoid selling the home if you need to qualify for Medicaid. Some people seem to think that transferring ownership of their house will help their eligibility for benefits and that this strategy is easier and less expensive than properly dealing with their 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 with my firm or another qualified attorney 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. Many of the elderly have owned their houses for a long time, and its value has dramatically increased, leading some to believe that by transferring their homes to their children, he or she could make a windfall by selling it.
While this may be true, unfortunately, some overlook the fact that they will have to pay capital gains tax on the difference between their parents’ home’s value when they purchased it and their home’s selling price at the time it’s sold by them. Depending on the home’s value, these taxes can be astronomical.
If you have had these thoughts, a better alternative may be to transfer your home at the time of your death, and allow your child to receive what’s known as a “step-up in basis.” It’s one of the only tax 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 his or her ex a share of its value.
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 and 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, I encourage you to speak with a qualified attorney who can help you find better ways to qualify for Medicaid and other benefits 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 when you die.
My firm offers 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 me today to learn more.