Many people are afraid of losing their home if they have to enter a nursing home and apply for Medicaid to cover the extreme expense. While this fear is well-founded — the average cost of a nursing home in Kansas City Metro is about $5,000-$7,000+ per month — transferring your house to your children is usually not the best way to protect it. Previously, we have talked about the six ways to pay for a nursing home. Today we will focus on the “coffee shop” solution of giving your house to your children.
Estate Recovery — What Is It?
Although you generally do not have to sell your home in order to qualify for Medicaid, because your home is an exempt asset for Medicaid qualification, the state could file a lien against your house after your death. If you get help from Medicaid to pay for the nursing home, the state must attempt to recoup from your estate whatever benefits it used to pay for your care. This is called “estate recovery.” Missouri and Kansas Medicaid are generally very aggressive when it comes to estate recovery. Many people consider giving their homes to their children in order to protect their home from this process, but there are problems with this approach.
3 Reasons NOT to Give Your House to Your Kids
This list is by no means exhaustive, but briefly touches on three of the most important reasons why giving your house to your kids could backfire and cause more problems:
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, and the penalty would not start until you have qualified for Medicaid, and that is when the Medicaid applicant is almost completely out of money.
There are circumstances under which you can transfer a home without penalty however, so it is best to consult a qualified elder law attorney before making ANY transfers. You 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
- Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
- A sibling who has lived in the home during the year 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 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 – By transferring your house to your children, 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. In addition, if your children are sued, have credit problems, or get divorced, the house will be vulnerable to their creditors.
3. Adverse tax consequences – Inherited property receives a “step up” in tax basis when you die, which means the tax basis goes up to the current value of the property at your death. However, when you give property to a child, the tax basis for the property is the same price that you purchased the property for long ago. 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 capital gains 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 are other ways to protect a house from Medicaid estate recovery, including putting the home in a trust. To find out the best option for your circumstances, consult with an elder law attorney. To continue reading on the topic, visit our blog:
• 6 Ways to Pay for a Nursing Home
• Is Medicaid Planning for Everybody?
• How Will I Pay for Long-term Care?
• Medicaid Planning: Should I Give it Away or Put It In a Trust?
• 7 Things to Consider When Planning For and Preserving the Family Farm
One of the biggest goals of our firm is to listen to your concerns, understand your specific needs, and then customize a plan to effectively address those needs. We do this for general estate planning; issues of elder law like long-term care planning, Medicaid planning, and Veterans benefits; special needs planning; and business planning.
We look forward to a chance to assist you with evaluating what type of plan will help you most. Please call us at 913-345-2323 to schedule a no-cost consultation.
If you have been happy with the planning process, and know friends or family who could benefit from a customized plan, please pass this post along. The greatest compliment we can receive is a referral from a satisfied client.