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Medicaid and the Principal Residence

A discussion of your options when trying to safeguard your home while qualifying for Medicaid services.

Spending for the high costs of long term care today can be economically ravaging. For lots of couples the primary residence is their most important possession and securing that possession in case one or both partners must need long term care is of main concern for them as well as their kids. Receiving Medicaid in order to pay for those expenses will ease that concern. Medicaid is a joint federal/state program which pays for the medical care expenses of individuals with little or no resources. This short article will go over three alternatives readily available to lots of couples who pick to remove the principal residence from the resource limitation permitted by Medicaid. The choice regarding the appropriate option will be directed by a number of elements such as the transfer’s effect on Medicaid eligibility, gift taxes, expense basis concerns, and prospective capital gains tax repercussions.
The first alternative is a straight-out gift transfer of the residence. While this alternative is relatively basic to achieve, involving a deed transfer and perhaps a present tax return, the downside might be significant because the transferees (typically the kids) would take as their expense basis the moms and dads’ expense basis. To put it simply, when the kids eventually offer the house, they might need to pay a substantial capital gains tax for which they can not declare any exemption. In addition, the transfer might set off a present tax depending on the value of the residence. Even more, the transfer will set off a penalty period in the event a Medicaid application is submitted within five (5) years of the transfer (the Medicaid “look back” period). Lastly, the parents might be at the grace of the kids as they have actually not maintained any ownership rights.

The 2nd alternative is a transfer of the house with a maintained life estate. This alternative also involves an easy deed transfer however includes a declaration in the deed scheduling to the moms and dads the right to the usage and tenancy of the home for the remainder of their lifetimes. In this case, the kids can not exercise their ownership rights while the life estates exist without the approval of the moms and dads. On the other hand, the parents can not exercise particular ownership rights without the consent of the kids. In addition, because Medicaid permits the worth of the kept life estate to be subtracted from the overall worth of the residence when identifying the period of ineligibility, this transfer might produce a shorter penalty duration than an outright transfer and even a transfer to a trust. Even more, given that the parents keep a life interest in the residence, the kids will get a “step-up” in cost basis of the home at the enduring parent’s death. This implies that when the children eventually offer the house they might have little or no capital gains tax. This choice sounds great unless the concern develops of offering the residence throughout the regard to one or both of the moms and dads’ life estates. Since the parents only own a life interest in the house, not only would they require their kids’s grant the sale, but upon the sale the capital gains tax exclusion they would otherwise delight in ($500,000.00 per couple, $250,000.00 per person) might be seriously lessened thereby possibly causing capital gain taxes to be due.

The third alternative, a transfer of the residence to an Earnings Just Trust, likewise called a Medicaid Qualifying Trust, can minimize the capital gains tax issue. The trust, as long as it is structured correctly, will permit the parents to be taxed from an earnings tax perspective as the owners of the trust so that upon a sale of the home, throughout their life times, their entire capital gain exemption will be readily available to them. Further, the Earnings Just Trust will not trigger any present tax concerns considering that the transfer of the residence to the trust will not be identified as a present. In addition, because the moms and dads likewise schedule a life interest in the home through the trust, their continued use of the house is fairly protected. Once the residence passes at the death of the surviving moms and dad, the kids will still receive a stepped up cost basis so that when they sell the house, there would be little or no capital gains tax. Obviously, the costs associated with creating a Medicaid Qualifying Trust may be higher than with an outright transfer or a transfer with a retained life estate. In the occasion the moms and dad uses for Medicaid within 5 years of the transfer, the entire value of the residence will be used in figuring out the charge period unlike the deed transfer with a maintained life estate.
The transfer of the home to an Earnings Only Trust not only supplies security of the home in the occasion long term care is needed, but likewise provides earnings and present tax advantages while maintaining the moms and dads’ entire capital gains tax exclusion. This is a good option if there is uncertainty as to whether the house can be kept until the death of the surviving parent. However, if the need for long term care is more than likely to take place within the 5 year Medicaid recall period, a transfer with a maintained life estate and the lowered penalty duration that could result may be the better option. As with any legal problem, each case must be examined on its private merits and an attorney acquainted with these concerns ought to be sought advice from in order to select the very best choice and implement it effectively.