Protecting One's Home When Planning for Medicaid

By Ronald A. Fatoullah, Esq. and Stacey Meshnick, Esq.

{4:02 minutes to read} Oftentimes the main concern for clients who are thinking about engaging in Medicaid planning is how they can protect their homes. It is, unfortunately, a widely held misconception that the only option is to sell a home and spend down the proceeds in order to qualify for Medicaid.

Rather, it is often recommended to transfer the home in advance in order to protect the asset from being used to fund future long-term care costs. However, before transferring real property, there are options that should be considered.

In order to qualify for Medicaid, one can transfer property to another individual (e.g., a child) or to an irrevocable trust. When applying for nursing home Medicaid, the Medicaid agency looks at any transfers made within five years of the application, and such transfers may create a period of ineligibility ("penalty").

It is important to know that there are certain individuals to whom assets can be transferred without the imposition of a penalty period. The following are individuals to whom a home may be transferred without penalty:

• a spouse,
• a child under 21, or a blind or disabled child,
• a trust for the sole benefit of a disabled individual,
• a sibling with an equity interest in the home who has resided there for at least one year prior to the applicant's institutionalization in a nursing home,
• and a "caretaker child" who has resided in the house for at least two years prior to institutionalization and who provided care.

If one is in need of nursing home care immediately, a transfer to any of the above individuals will not affect Medicaid eligibility. However, if there is time to plan in advance without immediate need for nursing home care, there are some very critical issues to take into consideration.

If one transfers a house to a child, the asset may be vulnerable to some unforeseen consequences, namely potential lawsuits, creditors or a divorce. The child's name will be on the deed, which is public record, so any liens of the child could potentially attach to the property.

In addition, transferring a home to an individual who does not reside in the home may result in significant capital gains tax ramifications. If Mom sells a home for $500,000 that she purchased for $100,000, Mom has $400,000 of gain. However, if Mom has owned and occupied the property for 2 out of the last 5 years, Mom would be eligible for $250,000 exclusion of the gain. Hence, Mom would pay tax on $150,000 of the gain rather than the $400,000 in gain.

If Mom transfers to daughter that same house she purchased for $100,000, daughter's "cost basis" will be $100,000 (same as Mom's) but daughter is not entitled to the $250,000 exemption (because she doesn't meet the residency and ownership requirements). Hence, if daughter sells the property for $500,000, daughter will pay capital gains tax on the $400,000 gain. Daughter will not get the $250,000 exemption to which Mom is entitled.

A final note on capital gains tax is that if someone inherits a property, they will get a "step up" in tax basis, which means the basis, or starting point for calculating taxes, will be the fair value of the property on the date of death. In the above example, if daughter inherits the home and it is worth $500,000 on mom's death, daughter's basis will be $500,000. If daughter sells for $500,000 she will not incur any capital gains tax.

Transferring property to an irrevocable trust may allow an individual to retain the $250,000 capital gains tax exclusion that one is entitled to when selling a home in which one lives. Transferring to an irrevocable trust may also avoid the property being subject to another person's creditors, divorce, etc. Finally, the ultimate beneficiaries of the property transferred to an irrevocable trust will inherit the property, thereby getting the "step up" in basis discussed above.

Due to the many considerations when transferring property in contemplation of requiring long-term care, it is important to consult with a knowledgeable elder care attorney.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Stacey Meshnick, Esq. is a senior staff attorney at the firm who has chaired the firm's Medicaid department for over 15 years. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.