Planning for long-term care, and protecting one’s home in the process, is a concern for many. In general, selling one’s one home in order to qualify for Medicaid coverage for nursing home (or other covered long-term) care is not necessarily required. Despite this fact, there is a common fear amongst individuals applying for, and those who anticipate needing to apply for, Medicaid coverage for nursing home (or other covered long-term) care that they will lose their home; or, that their spouse will lose the home and will have nowhere to live. While this fear, and the desire to protect one’s home, is certainly understandable, it is important to understand that giving away one’s home to his/her children (or someone else) may not be the best way to protect it. In fact, doing so may lead to severe unintended consequences. Accordingly, here are three reasons why individuals should NOT transfer their home, without first consulting with their elder law attorney regarding the potential negative consequences that may occur and to learn what other options might be available in their particular circumstance:
- Medicaid ineligibility. Transferring one’s home to his/her children (or someone else) may make one ineligible for Medicaid for a period of time. The Medicaid eligibility and transfer penalty rules regarding the transfer of one’s home (when determined to be a non-allowable transfer) are harsh and unforgiving. Basically, the state Medicaid agency looks at any transfers made within five years of the Medicaid application. If the applicant has made a transfer for less than market value within that time period, the state will impose a penalty period during which the applicant will not be eligible for benefits. Depending on the value of the home, the period of Medicaid ineligibility could stretch on for years, and it would not even start until the Medicaid applicant is almost completely out of money. Exceptions: There are, however, some exceptions to the Medicaid penalty rules related to the transfer of one’s home. The circumstances under which one can transfer his/her home without incurring a Medicaid penalty requires that very specific criteria (which may vary from state to state) be met. Thus, it is critical that individuals consult with a qualified elder law attorney BEFORE proceeding with such a transfer to determine whether their circumstance fits within any of the exceptions.
- Loss of control. By transferring one’s home to another person or persons (usually one’s children), the individual will no longer own and/or have control of the home. The recipients of the transfer will be able to do whatever they want to with the home. In addition, if the recipients are sued or get divorced, the house will be vulnerable to their creditors.
- Adverse tax consequences. Inherited property receives a “step up” in basis when one dies, which means the basis is the current value of the property. However, when one makes a lifetime transfer of his/her home to a child (or someone else), the tax basis for the home is the same price for which the individual purchased the home. Thus, unless the recipient of the gift of the home meets the IRS rules to qualify the home as his/her residence for the required length of time, the recipient (usually the individual’s child or children) will incur capital gains taxes, when he/she sells the home (which may or may not be after the individual’s death). Accordingly, it is important to seek both legal and tax advice BEFORE proceeding to determine the likely tax consequences to the recipient of the transfer.
Likewise, when planning for one’s home, understanding the rules regarding when the state may file either a lien, or an estate claim (upon one’s death) against the home is also important. When Medicaid contributes to the cost of one’s long-term care in a nursing home (or other covered care), the state must attempt to recoup from one’s estate whatever benefits it paid for the individual’s care. This is called “estate recovery.” Again, consulting with an elder law attorney regarding the Medicaid rules related to liens and estate claims, BEFORE proceeding with such a transfer, will allow one to carefully consider all of the necessary information, and crucial pieces, of putting together a plan that may result in protecting one’s home, should Medicaid coverage for long-term care be necessary.
Simply put, the bottom line is that there may be viable ways to protect one’s home for the benefit of a qualified person and/or from a potential lien and/or Medicaid estate recovery. However, to determine what options may be available, consulting with an elder law attorney PRIOR to proceeding with a home transfer, is absolutely critical.
The Elder Law Center, P.C. (a division of Mickey, Wilson, Weiler, Renzi & Andersson, P.C., http://www.mickeywilson.com) is located in Sugar Grove, IL, Kane County, in the Chicago Western Suburbs, phone number: 630-844-0065.