The tragic Covid-19 Pandemic forced many to adjust their lifestyles and to place greater emphasis upon making their home truly their castle. The pandemic resulted in significant home renovations to adjust to a new lifestyle of staying close to home and at home. The pandemic also resulted in increasing home values, especially in Westchester, Putnam and Fairfield Counties as many New Yorkers fled New York City and other urban areas for the suburbs.
Most seniors have always been concerned about losing the equity in their home to the cost of long-term care. During the course of an initial consult my clients will often say, “I don’t want them to take my house.” To which my response is that Medicaid doesn’t physically evict you from your home and take it, but they could have a claim/lien against your home for the value of services they have provided to you.
Thankfully, there are options available to the client wanting to protect their home, some of which are much better than others, for tax and Medicaid eligibility reasons. In this article I will look at the most commonly used options to protect one’s home or homes:
- Deed of home with the reservation of a life estate (the right to reside in the home and the obligation to pay its expenses).
The transfer of the home with the reservation of a life estate creates the look back periods (periods of ineligibility) for Medicaid home care and nursing home (30 months for home care and 60 months for nursing home). However, if the house is not sold during the lifetime of the person(s) transferring the home; the recipient of the home will receive the value of the home at its fair market value on the date of death of the individual(s) that transferred the home to them; Under Section 2036(a) of the Internal Revenue Code (IRC) the retention of a life estate results in the property being included in the estate of the transferor for estate tax purposes at its fair market value on date of death. The recipient of the remainder interest receives what is known as a step up in the cost basis of the home at its fair market value on the date of death of the life estate holder. However, this form of conveyance can be problematic if the home is sold during the lifetime of the transferor. A sale during the lifetime of the transferor will result in a loss of the step up in cost basis, thus, subjecting the recipient of the home to a potential capital gains tax if they do not reside in the home and are not eligible to receive the personal residence exclusion for capital gains tax purposes. Additionally, if the home is sold during the life of the person holding the life estate, pursuant to the rules for Medicaid eligibility, said person is entitled to receive a portion of the proceed of sale based on the actuarial value of their life estate as it relates to the sale price of the home. This will either result in their receipt of a portion of the sale proceeds which, depending on the amount will disqualify them for Medicaid. Alternatively, if they decide not to receive said portion of the sales proceeds they are considered to have made a gift by Medicaid, thus, creating a new look back period for Medicaid eligibility. In essence, they are defeating the original purpose for which they made the original transfer, which was to protect the equity in their home for purposes of long-term care. Furthermore, a deed without life estate poses issues if the person receiving the home has issues stemming from a bankruptcy, and creditors they may have.
- Transfer to an Irrevocable Medicaid Asset Protection Trust (MAPT)
Because of both its tax advantages and the fact that it creates a look back period for Nursing Home and Home Care Medicaid, in virtually all cases with the exception of where the transfer can be made without any look back period (an exempt transfer), utilizing a MAPT is the most logical and rewarding option. The MAPT is a ‘defective grantor trust.’ The creator of the trust is considered as the owner of the assets in the trust from an income tax (including capital gains tax) perspective. Thus, if the home is sold by the trust during the lifetime of the creator/grantor, the creator/grantor will be entitled to utilize their personal residence exclusion ($500,000 if married and $250,000 if single). Additionally, the creator/grantor of the MAPT is entitled to any real property tax exemptions they are otherwise eligible for (STAR, Veterans, Senior Citizens, etc.). During their lifetime, the creator of the Trust has the right to reside in the home(s) transferred to the MAPT and no one can sell or rent the home without their permission. The creator of the MAPT is still obligated to pay all the expenses for the maintenance and upkeep of the property. Upon the death of the creator/grantor, the home is then includable in the taxable estate of the creator/grantor’s at its fair market value on date of death. Thus, the trust beneficiaries will receive the property with a ‘stepped up’ cost basis. The transfer of the home to the MAPT also creates the look back periods for Medicaid home care and nursing home, and the assets transferred to MAPT will pass to the beneficiaries outside of probate. The MAPT provides both asset protection benefits, tax benefits and avoidance of probate. The above also applies if the MAPT is funded w/ liquid assets (stocks, bonds, cash). The creator of the MAPT reserves the right to remove and replace the Trustees and change whom the ultimate beneficiaries of the Trust are. Having assets in a MAPT will also help eliminate issues with the recipient of the home having creditors, judgements and bankruptcies.
- Transfer to a Revocable Living Trust (RLT)
RLT provides all the tax advantages of the MAPT, however, the transfer to a RLT does not create a look back period for Medicaid eligibility. Thus, there exists the possibility that Medicaid can impose a claim/lien against the trust assets for the value of services provided if the recipient is no longer residing in the home and is determined by Medicaid to be in permanent absent status.
In conclusion, for many decades the MAPT has been and continues to be the best choice for those willing and able to engage in Medicaid Asset Protection Planning. It is a planning tool with many advantages.