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By John M. Bigler For many older people living on Long Island, their largest asset is their home. Many are led into a false sense of security because the home is an exempt resource during their lifetime and will not cause a period of ineligibility for Medicaid purposes. The problem with a home is that after the death of an individual or their surviving spouse, a lien can be attached by the Department of Social Services to recover the cost of any medical expenses paid out on behalf of the owners. Therefore, for many older people seeking a precautionary consultative consultation, typically the focus will be on preserving the home. One of the beauties of planning in regard to a home is that action can be taken to protect the home while still allowing the owner to retain a significant degree of control.
A second method of conveyance would be to transfer the deed with the older person or couple retaining a life estate. A life estate allows the original owner exclusive occupancy of the home for the rest of his or her life. None of the grantees could move into the home without the life estate holder's permission. The property could not be sold without their permission, or without any of the permission of the grantees. The life estate holder would be allowed to retain any senior citizen's or veteran's real estate tax discounts to which they might be entitled. This restriction on the deed would mean that the gift was not completed during lifetime but only on death. Therefore on death, the home would be included in the estate of the older person for estate tax purposes, thereby allowing the grantees or new owners a step up in basis. This method of transfer would still avoid a lien on the property for Medicaid purposes. The drawbacks of a life estate are that it would only allow the original owner to use a percentage of their capital gains exclusion representing their share of the home in the life estate. Also, if the original owner was institutionalized and receiving Medicaid, Medicaid would ask for an assignment of life estate proceeds meaning that if the house was sold that percentage of the home representing the life estate would have to be turned over to Medicaid. Although there is no requirement the house be rented, if it were, the net rental after expenses would have to be turned over to the nursing home as additional income to reduce Medicaid's cost. A transfer of property with a retained life estate would only result in a period of ineligibility for Medicaid nursing home care based on the percentage of the home being transferred as opposed to that percentage of the home representing the life estate.
The third option would be to transfer the home into an irrevocable trust. In the irrevocable trust, someone other than the grantor would be the trustee. The trustee would not have the right to invade principal on behalf of the grantor, but the grantor would be entitled to any income generated. The grantor would have the right to replace the trustee at any time as well as change beneficiaries of the trust at any time. The trust would preserve the grantor's $250,000 capital gains exclusion, or if it were a couple, the $500,000 exclusion. It would also prevent the assignment of the life estate portion to the Department of Social Services if the house were sold. The trust would allow for the grantor to retain exclusive occupancy of the property. The transfer of the property into a trust would cause a penalty for the full value of the property.
Most older people considering their options will decide between retaining a life estate or setting up an irrevocable trust. The cost of a life estate is significantly less and again the period of ineligibility typically will be markedly reduced. For example, an 80 year old transferring a $400,000 house will be considered to have retained 44% of the property based on age. That means that they are only transferring $224,000 and, on Long Island, would only suffer a penalty of approximately 24 months. If the home were transferred into a trust, the period of ineligibility would be based on a transfer of $400,000 and would result in a period of ineligibility of approximately 43 months. If there is no intention of selling the home during the grantor's lifetime, then the life estate achieves all of the benefits of the trust. Typically, if the grantor would like the flexibility to sell the home in the future, or would simply like to keep a greater degree of control, then the trust becomes more appealing. As a general rule, the trust is most appropriate for a younger, healthier senior who has significant other assets besides the home. The life estate can be ideal for an individual who is on the verge of needing nursing home care so as to reduce the period of ineligibility. In that situation, the family simply has to understand that the house should not be sold under any circumstances during that individual's lifetime.
The decision to transfer a home is a major decision that needs to be thought out carefully. I have seen too many people panic and make a deed transfer without really understanding the consequences. On the other, I have seen situations where people were lulled into a false sense of security because the home is considered exempt during their lifetime. This is a decision that requires serious thought and wise counsel. It is not a decision to be rushed into.
Reprinted with permission of the Suffolk Times © 2004 [ Contact Us ] [ Guestbook ] [ Email ]  The Law Offices of John M. Bigler, Attorney At Law 1421 Wantagh Avenue, Wantagh, New York 11793-2206 1-888-ELDER-LAW · 516-409-6565 · Fax: 516-409-6522 E-Mail: info@biglerlaw.com · Web Site: www.biglerlaw.com |
One possibility in transferring the home is to make a straight transfer to other family members such as children. With such a deed, the house would be completely out of the senior's name. They would lose any senior citizens' real estate tax discounts that they might be entitled to. They would also lose their capital gains exclusion of $250,000. They would lose control over any decisions regarding the property. They would have no right, title or interest to the property whatsoever. The children would receive the home at the value that it was originally purchased for. Upon the sale of the home the children would then have a capital gains being the difference between the original cost basis and the value of the home at the time of the sale. The only benefit to this would be that there would be no danger of a lien attached by the Department of Social Services.