PROTECTING THE FAMILY HOME AGAINST NURSING HOME COSTS

Preserving Your Most Important Asset

by Matthew J. Dorsey for Saratoga TODAY

I am often asked about options to protect the family home in the event a client has to enter a nursing home. The possibility that your home, a precious and treasured asset, might have to be sold to pay for nursing home care, is an outcome most people would prefer to avoid.

There are several options to consider when planning to protect the family home, and they are described below. In each of these cases, we will consider the ultimate beneficiaries of the home to be the client’s children, which is most often the case. If you have different beneficiaries in mind, i.e. friends, nephews or nieces, the same rules will generally apply.

In considering the following options, it is important to understand that in each case, the house must be transferred more than five years before you apply for Medicaid to pay for nursing home care. This five-year period is known as “the look back period”. It is the period of time that the Medicaid authorities will review when determining if you have made any gifts for which they may penalize you. No penalties will be imposed for any gifts made more than five years before a Medicaid application.

OPTION ONE: DEEDING

YOUR HOUSE OUTRIGHT

You can simply deed your house outright to your child. In that case, your child would own the home and you have no further legal rights to it. You would lose your STAR exemption for school taxes. In addition, if your child later sells the home, they may have to pay capital gains taxes because they would be using your cost basis in the property, which may be significantly lower than the price they sell it for.

If your child owns the house you live in, there could also be other significant problems that develop. If you and your child become estranged, there would likely be nothing to stop your child from selling the home and forcing you to leave. You could potentially have an agreement or lease to protect against this possibility, but even with such protections, you may end up in expensive litigation. In addition, since your child owns the home, it would be subject to potential liens by your child’s creditors. If your child got into financial difficulty, such a lien from a child’s creditor could potentially result in a foreclosure on the home.

OPTION TWO: DEEDING YOUR HOUSE SUBJECT TO A RETAINED LIFE ESTATE

You can deed your house to your child, subject to a reserved life estate in you. In this case, your child will have what is known as a “remainder interest”. This will guarantee that you have the legal right to remain in the home for as long as you live. You will also retain your STAR exemption. In addition, your child will receive a “step up” in basis equal to the home’s value at your death, thereby potentially reducing capital gains taxes if they later sell it. There is also no need for any estate proceeding to occur in Surrogates Court to pass the property over to your child upon your death. The transfer will occur automatically, due to your passing.

Despite these advantages, there are also disadvantages. One such disadvantage is that you would need your child’s cooperation if you wanted to sell the home during your lifetime. If a sale did occur, you would need to receive a percentage of the sale proceeds based on your life expectancy. This could result in you having too many assets to qualify for Medicaid at a future date.

Option Three: Deeding your house to an Irrevocable Trust

If you deed your house to a properly drafted Irrevocable trust, you will retain your STAR exemption and your child will receive a “step up” in basis at your passing. The trust could also be drafted to ensure that the home is safe from the claims of creditors of your children, so that you can avoid the potential pitfalls described in option one. In addition, the trust could include a provision known as a limited power of appointment. This provision would allow you to change the beneficiaries of the trust at a future time. It may be advisable to do so, if one of your beneficiaries is experiencing financial difficulties. As with option two, you would also not need to have an estate proceeding after your death in order to pass the property over to your child.

The trustee of the trust could sell the home during your lifetime, without the concern that part of the sale proceeds would flow to you. The sale proceeds would remain in the trust and could be used to invest in assets which produce income for you. In the alternative, the sale proceeds could be used to purchase a new home for you, such as a retirement home in another state. Either way, the proceeds would remain in the trust, and you would be protected from having those assets affect your Medicaid eligibility. It is extraordinarily important that if the trust sells the house, that none of the sale proceeds come out directly to you. In order to ensure that does not occur, it would be wise to consult with an elder law attorney prior to the closing on the sale. While every situation is different, the transfer of a home to an irrevocable trust is generally the best option for the preservation of the asset. Although, in some limited instances, a deed with reserved life estate may be a sensible choice. In general, it is rare that an outright transfer would be a favored option. For an evaluation of what option is best, you should contact an experienced elder law attorney in your area.

Matthew J. Dorsey, Esq. is a Senior Partner with O’Connell and Aronowitz, 1 Court Street, Saratoga Springs. Over his twenty-six years of practice, he has focused on the areas of elder law, estate planning, and estate administration. Mr. Dorsey can be reached at 518-5845205, mdorsey@oalaw.com and www.oalaw.com

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