Are you afraid of losing your home if you have to enter a nursing home and apply for long term care Medicaid? While this fear is well-founded, transferring the home to your children is usually not the best way to protect it.
Although a home generally does not have to be sold in order to qualify for Medicaid coverage of nursing home care, the state could file a claim against your estate after you die. If you get help from Medicaid to pay for the nursing home, the state must attempt to recoup from your estate whatever benefits it paid for your care. This is called “estate recovery.” If you want to protect your home from this recovery, you may be tempted to give it to your children. Here are three reasons not to:
1. Medicaid ineligibility. Transferring your house to your children (or someone else) may make you ineligible for Medicaid for a period of time. The state Medicaid agency looks at any transfers made within five years of the Medicaid application. If you made a transfer for less than market value within that time period, the state will impose a penalty period during which you will not be eligible for benefits. Depending on the house’s value, the period of Medicaid ineligibility could stretch on for years.
There are circumstances under which you can transfer a home without penalty, however, so consult with your attorney before making any transfers. You generally may freely transfer your home to the following individuals without incurring a transfer penalty:
- Your spouse
- A child who is under age 21 or who is blind or disabled
- A special needs trust for the sole benefit of a disabled individual under age 65
- A sibling who has lived in the home for at least one year immediately preceding the applicant’s institutionalization and who already holds an equity interest in the home
- A “caretaker child,” who is defined as a child of the applicant who lived in the house for at least two years immediately prior to the applicant’s institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay
2. Loss of control. Transferring your house to your children means that you will no longer own the house, which means you will not have control of it. Your children can do what they want with it, including kick you out of it if you have not reserved a life estate. In addition, if your children are sued or get divorced, the house will be at risk.
3. Adverse tax consequences. Inherited property receives a “step up” in basis when you die, which means the basis is the current value of the property. However, when you give property to a child, the tax basis is the same price that you purchased the property for. If your child sells the house after you die, he or she would have to pay capital gains taxes on the difference between the tax basis and the selling price. The only way to avoid some or all of the tax is for the child to live in the house for at least two years before selling it. In that case, the child can exclude up to $250,000 ($500,000 for a couple) of capital gains from taxes.
There may be other ways to protect a house from Medicaid estate recovery, including putting the home in a trust. Medicaid rules may vary by state. To determine the best option in your circumstances, consult with your attorney.