Parents and married couples often ask whether they should deed their primary residence to their adult children. The answer depends on the objective. Many clients seek to avoid probate following their deaths, making transferring the house during their lifetime a means of estate planning. Other clients are focused on the rising health care costs and their potential needs for assisted living or long-term nursing home care. For Monroe, Ontario, and Livingston counties, the estimated cost for nursing home care is $140,304.00 per year or $11,692.00 per month. These estimates are average nursing home rates. The actual cost of a nursing home can be higher or lower depending on the type of facility. Since long-term care planning with real estate often requires advance planning, it is important to understand what Medicaid planning is and why you may want to explore your options now.
Medicaid, not Medicare, is the primary payer for long-term care services nationwide. Medicaid allows for the coverage of both community-based care and institutional care for individuals who meet strict income and resource guidelines. However, in exchange for providing this coverage, Medicaid is entitled to a “right of first recovery” against your estate. Even though your primary residence is an exempt asset during your lifetime, if your house or any other assets of value passes through your estate, Medicaid will be able to place a lien on the house or those other assets to recover the value of the services covered by Medicaid.
Transferring the family home to one or more children is a common estate planning technique. In planning for rising long-term care costs with real estate, many parents opt to deed their home to their children while reserving the right to live in the home while they are still alive. This is called reserving a life estate. The parents become “life tenants” of the property while the children legally own the title to the property. For those concerned about keeping their STAR exemption, the exemption remains unaffected because it is based on the qualifications of the life tenants, rather than the children to whom the property was deeded. If circumstances dictate that the home must to be sold during the parents’ lifetime, it can be sold, but only with the life tenants’ consent. If the house is not sold while the life tenants are alive, then after their deaths, the children would own the property outright and receive the benefit of a “stepped up” tax basis equal to the value of the home as of the date of death, eliminating capital gains tax in most cases when the children sell the property.
A major consideration in reserving a life estate is the implication of a gift for nursing home care planning purposes. When qualifying for Medicaid, there currently exists a five-year look back period from the date of application, which means that any gift made within the previous five years is reportable on the application. Even gifts below the taxable annual exclusion amount, if made in the last five years, will be reportable. These gifts potentially subject the applicant to a penalty equal to the amount of the uncompensated value of the gift. The execution of a quitclaim deed for the benefit of children without consideration is considered an irrevocable gift. In addition, if the house is later sold while the parents are residing in a nursing home and receiving Medicaid benefits, the value of the parents’ life estate must be paid towards the cost of the parents’ care.
For most families, their home is their greatest asset. Between the memories of raising your children to the sweat equity that you have built over the years, there are many reasons why preserving your home to pass on to your children may be important to you. Transferring your primary residence while reserving a life estate is only one long-term care planning technique for real estate and it may not be appropriate for your individual situation. If you find yourself wondering about what to do, it is important to discuss those objectives with your attorney and accountant. The attorneys in our office are experienced in real estate, estate planning, elder law and asset protection planning, and are well equipped to review your situation, explain your options and implement the appropriate planning strategies to achieve your goals.
This article is intended for general informational purposes only and should not be considered legal advice or counsel, nor does it create an attorney-client relationship.
Christine Szpet is an attorney focused on practicing Real Estate, Estate Planning and Elder Law. She advises her clients and their families on navigating the legal issues that come at the intersection of real estate, business succession planning, estate planning, and long-term care planning. Christine can be reached at firstname.lastname@example.org or (585) 672-5500.