Medicaid and the Principal Residence
A discussion of your choices when trying to secure your house while certifying for Medicaid services.
Paying for the high expenses of long term care today can be economically devastating. For many couples the primary residence is their most valuable asset and protecting that possession in the event one or both partners should require long term care is of primary issue for them as well as their kids. Getting approved for Medicaid in order to spend for those expenses will alleviate that burden. Medicaid is a joint federal/state program which pays for the medical care costs of individuals with little or no resources. This article will go over three alternatives offered to numerous couples who choose to eliminate the primary house from the resource limitation permitted by Medicaid. The choice regarding the proper choice will be guided by a number of aspects such as the transfer’s effect on Medicaid eligibility, present taxes, expense basis concerns, and potential capital gains tax effects.
The first alternative is a straight-out gift transfer of the house. While this choice is fairly basic to accomplish, involving a deed transfer and perhaps a gift income tax return, the downside might be considerable due to the fact that the transferees (usually the children) would take as their cost basis the moms and dads’ cost basis. In other words, when the children ultimately offer the house, they may have to pay a huge capital gains tax for which they can not claim any exemption. In addition, the transfer might trigger a present tax depending upon the value of the residence. Even more, the transfer will set off a penalty duration in case a Medicaid application is submitted within five (5) years of the transfer (the Medicaid “recall” period). The moms and dads might be at the grace of the kids as they have actually not kept any ownership rights.
The 2nd option is a transfer of the house with a maintained life estate. This choice likewise includes a basic deed transfer but consists of a statement in the deed booking to the moms and dads the right to the use and tenancy of the home for the remainder of their life times. In this case, the children can not exercise their ownership rights while the life estates exist without the permission of the moms and dads. On the other hand, the parents can not work out certain ownership rights without the consent of the children. In addition, given that Medicaid allows the worth of the kept life estate to be deducted from the overall value of the residence when identifying the duration of ineligibility, this transfer might produce a much shorter penalty duration than an outright transfer and even a transfer to a trust. Further, because the moms and dads retain a life interest in the house, the kids will get a “step-up” in cost basis of the house at the making it through parent’s death. This means that when the children eventually sell the home they may have little or no capital gains tax. This option sounds terrific unless the concern arises of selling the residence throughout the term of one or both of the moms and dads’ life estates. Because the moms and dads only own a life interest in the residence, not only would they need their kids’s grant the sale, but upon the sale the capital gains tax exclusion they would otherwise take pleasure in ($500,000.00 per couple, $250,000.00 per individual) could be severely reduced consequently potentially triggering capital gain taxes to be due.
The third alternative, a transfer of the residence to an Income Only Trust, also called a Medicaid Qualifying Trust, can relieve the capital gains tax problem. The trust, as long as it is structured appropriately, will allow the parents to be taxed from an income tax standpoint as the owners of the trust so that upon a sale of the home, throughout their lifetimes, their whole capital gain exemption will be readily available to them. Even more, the Earnings Just Trust will not activate any gift tax concerns because the transfer of the home to the trust will not be characterized as a gift. In addition, considering that the moms and dads likewise reserve a life interest in the house through the trust, their continued use of the house is fairly safe and secure. Once the home passes at the death of the making it through parent, the children will still get a stepped up expense basis so that when they offer the residence, there would be little or no capital gains tax. Of course, the costs related to creating a Medicaid Qualifying Trust might be higher than with an outright transfer or a transfer with a maintained life estate. In the event the moms and dad applies for Medicaid within 5 years of the transfer, the entire value of the residence will be used in identifying the penalty period unlike the deed transfer with a retained life estate.
The transfer of the home to an Income Only Trust not only supplies protection of the residence in the occasion long term care is essential, however likewise offers income and gift tax benefits while preserving the moms and dads’ entire capital gains tax exemption. This is a great option if there is unpredictability regarding whether the residence can be retained until the death of the surviving parent. Nevertheless, if the need for long term care is more than likely to occur within the five year Medicaid look back duration, a transfer with a kept life estate and the reduced penalty period that might result may be the much better option. Similar to any legal concern, each case needs to be examined on its specific merits and an attorney knowledgeable about these concerns need to be sought advice from in order to pick the very best choice and implement it appropriately.