For many people, their home is the single largest asset they own. Protecting it from long term care expenses is often a primary concern. However, some clients think the best way to protect the home is by simply transferring the home to one or more children. Unfortunately, it is not that simple. While protecting your home is a legitimate concern, there are many issues that must be discussed and resolved prior to any transfer of your home. There can be unintended income tax, estate tax and gift tax consequences if your home is blindly transferred. There may also be serious Masshealth implications resulting from a transfer of your home.
One of the most common ways to protect the home from long term care expenses is a life estate deed. This is a deed in which you transfer your home to the person(s) whom you want to have it after you pass away (remaindermen) but retain unto yourself the right to use, occupy, enjoy and live in the residence until you pass away. Typically, the transfer is to your children, who receive what is known as a future interest in the property. As the life tenant, you are responsible for paying the ongoing expenses of the property, such as taxes, insurance and maintenance costs. The life estate deed guarantees you the right to exclusive possession of the property, even to the extent of being able to exclude your children from the property during your lifetime. Your children cannot move in or kick you out of your home. Even if creditors have a claim against your child’s interest in the property, it is not subject to partition and cannot be sold absent your consent. This exclusivity also allows you to retain any tax abatements that may be available, such as veterans and senior citizens exemptions that were available prior to the transfer.
The procedure to complete this transaction involves a deed from the grantor to the grantee, (from you to your children), which must be recorded with the appropriate Registry of Deeds. Once the recording of the deed is effective, your children will have an ownership interest in the property. This means that you will not be able to sell, mortgage, refinance or in any way encumber the property without the consent of your children, and likewise, your children may not transfer or sell the property without your signature.
There are several benefits to this type of transfer. The first is that the property passes to your children as a matter of law without the necessity of having to be probated upon your death. However, the value of the real estate is included your taxable estate for estate tax purposes, but no estate tax would be due so long as you maintain assets below the federal and state limits. Since your home remains an asset of your estate for estate tax purposes, your children receive what is known as the step-up in basis of the real estate. This means that they inherit the property at the date of death value, not the value as of the date of the transfer nor the date upon which you acquired the property. So when your children sell the property, they should be able to avoid capital gains taxes unless, of course, the property appreciates to a value greater than the date of death value prior to the sale. In that instance, capital gains tax would be due on the difference between the date of death value and the actual sale price of the property.
Secondly, the transfer of the real estate to the children triggers the waiting period for Medicaid eligibility. Without providing all details relative to the Medicaid rules and regulations, this transfer will “start the clock ticking” on the transfer period, which is five (5) years. If you need nursing home care within five (5) years of signing the life estate deed, you would have to pay privately for your care until the remaining penalty period ended. In the event that you need long-term care benefits, however, your children can cure the transfer by deeding the home back to you. After the five (5) year transfer period, the property should be protected and Medicaid benefits obtained.
It is important to note, however, that a lien may be placed on the life estate for the value of services rendered during your lifetime. This lien is released upon your death and the property passes outright to your children. If the home is sold during your lifetime, you are entitled to only a portion of the proceeds. The capital gains exclusion would apply to the proportion of gain attributable to your interest in the property. However, there may be a capital gains tax assessed against your children for their share of the property. From a Masshealth perspective, if the house were sold, the percentage of your proceeds of the sale would be considered an available asset in determining eligibility. Thus, the life estate deed typically works best when there is no intent to sell the property.
If you were in a nursing home, it should be noted that the property would have to be maintained by your children or rented out. During any period that you are receiving benefits, Medicaid will not provide any allowance for you to maintain the property. If the property is rented, the net rental income must go to the nursing home as part of your patient paid amount and will be counted in determining eligibility for Medicaid.
Another Medicaid planning strategy involves a parent purchasing a life estate in the home of a child. Medicaid allows this technique so long as the parent actually resides in the home for at least a year after the purchase.
This article is not intended to be a complete and total explanation of the life estate deed. It is highly recommended that you consult an elder law attorney prior to making a decision to transfer your real estate. A life estate deed is not right for everyone. There are other options available for transferring your property, some of which may not cause a Medicaid ineligibility period. Thoughtful consideration must be given in determining your best course of action.