Medicaid and the Principal Residence

A discussion of your options when trying to protect your home while getting approved for Medicaid services.

Paying for the high costs of long term care today can be financially ravaging. For lots of couples the principal house is their most valuable property and securing that property in case one or both partners need to need long term care is of main concern for them in addition to their kids. Getting approved for Medicaid in order to spend for those expenses will ease that burden. Medicaid is a joint federal/state program which pays for the treatment costs of individuals with little or no resources. This article will discuss three alternatives offered to numerous couples who pick to eliminate the principal home from the resource limit allowed by Medicaid. The choice regarding the appropriate alternative will be guided by several elements such as the transfer’s impact on Medicaid eligibility, present taxes, expense basis problems, and possible capital gains tax repercussions.
The first choice is a straight-out gift transfer of the home. While this alternative is fairly basic to achieve, including a deed transfer and perhaps a present income tax return, the drawback may be significant because the transferees (usually the kids) would take as their cost basis the moms and dads’ expense basis. To put it simply, when the kids eventually sell the residence, they may need to pay a huge capital gains tax for which they can not claim any exclusion. In addition, the transfer may set off a present tax depending on the value of the home. Even more, the transfer will activate a penalty period in the occasion a Medicaid application is filed within 5 (5) years of the transfer (the Medicaid “look back” duration). The parents might be at the mercy of the kids as they have not kept any ownership rights.

The 2nd alternative is a transfer of the home with a kept life estate. This choice also includes a simple deed transfer however consists of a statement in the deed reserving to the parents the right to the use and tenancy of the home for the remainder of their lifetimes. In this case, the kids can not exercise their ownership rights while the life estates exist without the permission of the parents. Conversely, the parents can not work out particular ownership rights without the authorization of the kids. In addition, since Medicaid enables the worth of the kept life estate to be subtracted from the total value of the home when figuring out the duration of ineligibility, this transfer might produce a much shorter charge duration than a straight-out transfer or perhaps a transfer to a trust. Further, because the parents retain a life interest in the home, the kids will receive a “step-up” in expense basis of the house at the making it through parent’s death. This indicates that when the kids eventually offer the home they may have little or no capital gains tax. This choice sounds excellent unless the concern emerges of selling the house throughout the regard to one or both of the moms and dads’ life estates. Given that the moms and dads just own a life interest in the home, not just would they require their children’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 individual) could be severely diminished consequently potentially triggering capital gain taxes to be due.

The 3rd alternative, a transfer of the home to an Income Only Trust, also called a Medicaid Qualifying Trust, can reduce the capital gains tax problem. The trust, as long as it is structured properly, will permit the parents to be taxed from an earnings tax perspective as the owners of the trust so that upon a sale of the residence, during their life times, their whole capital gain exemption will be available to them. Further, the Earnings Only Trust will not trigger any present tax issues since the transfer of the house to the trust will not be characterized as a gift. In addition, considering that the moms and dads also book a life interest in the residence through the trust, their continued use of the residence is fairly safe. Once the residence passes at the death of the enduring moms and dad, the kids will still receive a stepped up cost basis so that when they offer the residence, there would be little or no capital gains tax. Obviously, the expenses connected with developing a Medicaid Qualifying Trust may be higher than with a straight-out transfer or a transfer with a kept life estate. Also in case the moms and dad applies for Medicaid within 5 years of the transfer, the whole value of the house will be utilized in determining the penalty duration unlike the deed transfer with a kept life estate.
The transfer of the house to an Income Just Trust not only supplies protection of the residence in the occasion long term care is essential, however likewise offers income and present tax benefits while maintaining the moms and dads’ entire capital gains tax exclusion. This is an excellent alternative if there is unpredictability as to whether the house can be kept up until the death of the enduring parent. However, if the need for long term care is most likely to take place within the five year Medicaid look back duration, a transfer with a retained life estate and the reduced penalty period that might result might be the much better choice. Just like any legal concern, each case ought to be examined on its individual merits and a lawyer knowledgeable about these problems need to be consulted in order to choose the very best choice and implement it properly.