Protecting the Family Home from the Cost of Long-Term Care
Lawrence Eric Davidow, Esq. | May 6, 2012, 1:14 p.m.
Nursing home care now costs in excess of $150,000 per year in New York. Middle class seniors simply cannot afford this cost and will likely spend all of their assets, including the value of their home, on their care without prior planning. Medicare does not pay for these costs and while recommended, most middle class seniors simply cannot afford long term care insurance. This reality leads many to access the Medicaid system. A prerequisite to obtaining Medicaid is poverty and thus many seniors are divesting themselves of their homes and other assets, often by use of an irrevocable trust. Since the family home is most often the largest and perhaps sole asset that middle class seniors are seeking to protect, this article will focus on the benefit of placing a home into an irrevocable trust. Note that, generally speaking, any transfer of the home will be subject to a five year look-back for Medicaid eligibility purposes.
*A home could simply be transferred to the children outright; however, we never recommend this because we want seniors to retain control over their home, we want to preserve all property tax exemptions and limit the exposure to capital gains. The irrevocable trust solves these problems.
*A home could also be transferred to the children with the senior retaining a life estate. A life estate is ownership of property but only for the life of the senior. The senior would retain the right to the income and possession of the property during life. The children would own the house, subject to their parent’s right to live there and enjoy the property.
The life estate accomplishes many of our goals: (i) the retention of control; (ii) the retention of all property tax exemptions; and (iii) the elimination of capital gains on the sale of the property after death. However, we have serious problems with life estates and rarely would advise their use. The problem is if the senior wishes to sell the house during their lifetime, a huge capital gain may be due on the portion owned by the children and the value of the house owned by the parent would be exposed to Medicaid. Most seniors need to keep at least the flexibility of selling their home during their life, so the use of a life estate would simply be bad planning.
Similar to the life estate, the irrevocable trust will protect the home from Medicaid, avoid probate, preserve property tax exemptions, provide for the elimination of capital gains upon sale of the property after the senior’s death, and most importantly retain control for the senior. However, the use of the trust also: (i) preserves the senior’s $250,000 ($500,000 for a couple) capital gains exclusion should the senior wish the trustee to sell the property during their life; and (ii) not expose any portion of the sale proceeds to Medicaid.
NEW LAW REPEALED
Last year, New York passed a law which empowered Medicaid to seek reimbursement from a Medicaid recipient’s life estate, upon the death of a senior. This was a further blow to the use of life estates. Thankfully, New York recently repealed this law.
However, it is possible, if not likely, that New York will regroup and enact another law that will make Medicaid planning with life estates less desirable. This law did not affect irrevocable trusts in the same way.
Middle class seniors are very concerned with the thought of losing their home (and other assets) to the high cost of long term care. The irrevocable trust is often the best way to protect these assets.