The Intersection of Medicaid and the Irrevocable Trust
The cost of paying for long-term care at home or in a nursing home is high. Most people do not have long-term care insurance that would cover at least some of that cost. Neither Medicare nor private health insurance pays for it. These people must then pay from their own funds until they become “poor enough” to qualify for Medicaid.
Sometimes, with or without advice, they give assets away to become “poor enough”. Sometimes, they make mistakes in doing so.
For example, giving your house to your children outright is often a mistake. Any property tax exemptions that you have are lost. The house is subject to the children’s judgment creditors. Since it is theirs, they can sell it “out from under you”. And it becomes a part of their estates when they die, even if they die before you do. For capital gains purposes, a gift of a house that has appreciated in value since the recipient became owner could have a significant adverse tax effect on that recipient when he or she sells it.
If you transfer your house and keep a “life estate” and a limited power to change the deed, some of these potential problems can be avoided. However, you would not be able to sell the house without the consent and signatures of the remainder owners. Even if everyone agreed to sell, there could be significant adverse tax and Medicaid eligibility effects.
The most logical solution is to transfer the house into a certain type of irrevocable trust. If the trust is written correctly, the house (and any other asset that is transferred into the trust) is not considered a countable “resource” for Medicaid purposes. Eligibility for Medicaid coverage at home is achieved on the first day of the month after the transfer, if the remainder of what you own is below a certain dollar amount. If five years pass before a nursing home Medicaid application is filed, the assets in a trust will not cause a penalty or period of ineligibility.
This plan is not for everyone. If you believe that someday you will need to use the equity from your home for living expenses, transferring that home is not a good idea. Although you would have the right to receive income from the assets in the trust, you would not be entitled to receive any principal from the trust assets. When a house is sold, the net proceeds are principal.
However, if you are satisfied that you will not need the money from the sale of your home, and will not need to obtain money by mortgaging your home, transferring it into this type of trust is a good way of protecting its value from potentially being used to pay for your long-term care.
Under the terms of this trust, you keep the right to exclusively use and occupy the home. You keep your property tax exemptions. If the house is in trust when you die, your beneficiaries still inherit at the date-of-death market value, which minimizes or eliminates capital gains tax.
A very significant advantage over a life estate transfer is that the trust gives you the right to tell your trustee to sell the house and buy another home for you, for your exclusive use and occupancy. So long as the transfer of the home to the trust occurred more than five years before a nursing home Medicaid application, the asset in the trust, whatever form it takes, is exempt for Medicaid purposes.
For example, assume that you transferred your house into an irrevocable trust in September, 2011, and the trustee sold the house, per your instruction, for a net price of $500,000 in 2014. The money from the sale went into the trust account and, per your instruction, the trustee bought a condominium for you at that time for $350,000. The remaining $150,000 stayed in the trust and the trustee invested that money, and paid you the income from the investment.
It is now more than five years since the transfer into the trust was made, and the need has arisen for long-term care, either at home or in a nursing home. The condominium and the $150,000 are protected assets, which are not included in determining your eligibility for Medicaid coverage. They will pass to your beneficiaries after your death under the terms of the trust that you created.
On the other hand, if you had transferred the remainder interest in the home to your children in September, 2011 and retained a “life estate”, and then some years later desired to sell the house, you would need the consent and signatures of the remainder owners. Even if that is not a problem, the tax code requires that a certain percentage of the sales price be paid to you, and the remainder percentage be paid to the remainder owners. The percentage to be paid to you depends upon your age. Even if this sale occurred many years after the five year “lookback” period for nursing home Medicaid eligibility, the division of the sale price would be required both by the tax code and by Medicaid regulations.
For example, based upon your age, 25% of the sale price might be attributed to you and 75% to the remainder owners. Even if the money does not actually get divided along those percentages, if you were on Medicaid or seeking Medicaid eligibility in a nursing home, you would be deemed to have received your 25%, which would then have to be used for your care before you could be eligible for Medicaid.
To make matters worse for your remainder owners, if the house that was sold was not their primary residence, they would not be able to exclude any of the capital gain from the sale and would have to pay a tax on their share.
This combination often has an unexpected, detrimental financial effect, especially if the house appreciated significantly in value since you purchased it. These problems are completely avoided by having placed the house into the proper irrevocable trust back in September 2011.
The issues of long-term care planning and Medicaid eligibility are complex. Financial aspects are only one concern. The proper level of health care and the emotional well-being and security of the elderly client are paramount concerns. Since each person’s circumstances are unique, including the extent of their potential support group, a consultation with an experienced elder law attorney for guidance is essential.
The rules regarding Medicaid eligibility are extremely complex, and many alternatives exist. Since each particular case has its own unique facts, the reader is cautioned that the above summary cannot be considered legal advice and should consult with an appropriate legal advisor.
Copyright 2016 Joseph A. Bollhofer, Esq.
Joseph A. Bollhofer, Esq., is an attorney who practices law in the areas of elder law, Medicaid, estate and business planning and administration, real estate and personal injury. He is a member of the National Academy of Elder Law Attorneys (NAELA) and of the Elder Law, Real Property, and Surrogate’s Court Committees of the Suffolk County Bar Association and the Elder Law, Real Property Law and Torts, Insurance and Negligence Sections of the New York State Bar Association. He has been serving area residents since 1985 and is admitted to practice law in New York and New Jersey. His office is located at 291 Lake Ave., St. James, NY. (631-584-0100). For reprints of this article and others send a request to email@example.com or visit www.bollhoferlaw.com.