By: Anthony J. Enea, Esq.
Many years ago I had my first encounter with the disastrous consequences that result when clients fail to take the necessary steps to protect their home from the cost of long term care, particularly nursing home costs. An elderly couple had consulted with me regarding a plan for protecting their assets in the event either one of them needed to enter a nursing home. Unfortunately, the clients decided not to implement my recommendations. As is often the case, several years later I received a telephone call from their daughter advising me that Dad had been placed in a nursing home because he suffered from Alzheimers dementia, and that Mom had recently passed away. Because title to their house was jointly held, upon the wife’s demise title to the house passed by operation of law to the husband. Thus, the primary residence was now an asset against which Medicaid could place a lien and assert a claim against.
As a result of the failure to implement a plan to protect the home, Medicaid was paid a significant amount upon the sale of the home. Although, we were still able to protect a significant portion of the sale proceeds, significantly more could have been protected if the recommended planning had been implemented.
With the average cost of a home in Westchester and Putnam Counties being approximately $500,000, it is not unusual for the primary residence to be the most valuable asset one owns. Thus, taking prudent steps to protect one’s home is well worth the effort.
For Medicaid purposes the primary residence is known as the “homestead” and is an exempt asset (does not effect eligibility for Medicaid) so long as it is occupied by the applicant, the applicant’s spouse or the applicant’s minor, disabled or blind child. The homestead can be a one, two or three family home, condo or co-op and still be exempt for Medicaid.
The homestead can be transferred to five (5) categories of people without affecting Medicaid eligibility: 1. Spouse; 2. Minor Child; 3. Disabled or blind child of any age; 4. Adult child who has lived in the home of the parent for at least two years immediately prior to the parent’s institutionalization and who has been a care giver to the parent; 5. A sibling of the Medicaid applicant who has resided in the home for at least one year prior to the institutionalization and who has equity interest in the home.
Thus, if you are able to utilize any of the aforestated transfers, no ineligibility for Medicaid would result.
Once a decision has been made to transfer the primary residence, whether it be as an exempt transfer or a non-exempt transfer (one that will create a period of ineligibility for Medicaid) a variety of estate tax, gift tax as well as capital gains tax considerations need to be made.
The most commonly utilized, and perhaps best Medicaid planning option relevant to the primary residence is the transfer of the residence to a Medicaid Asset Protection Trust, also known as an Irrevocable Income Only Trust. Title to the premises is deeded to the trustees of the trust and the home owners are granted a life estate in the premises, and may also be given the right to receive all of the trust’s income if liquid assets are transferred to the Trust. However, no invasion of the trust principal can be made to or for their benefit. However, the Trustees, can invade the principal of the trust for the benefit of the Grantor’s children or other third parties, not including themselves.
The transfer to the Irrevocable Income Only Trust will create a five (5) year look back period (ineligibility for nursing home Medicaid) as a result of the transfer. However, once the five year look back period has expired the house or any other assets transferred to the Trust will no longer be counted for purposes of Medicaid eligibility, and will no longer be assets against which Medicaid has a claim.
The transfer to the irrevocable trust has many estate and gift tax advantages which make it preferable to an outright transfer either with or without a life estate being reserved by transferor. For example, the transfer to the trust can be structured so as to avoid any gift taxes and to allow the beneficiaries of the trust to receive a step up in cost basis upon the demise of the transferor as well as allowing the continued availability of the principal residence exclusion for capital gains tax purposes.
In conclusion, irrespective of which specific planning option is chosen to protect the primary residence, the critical element is that some steps be taken to do so. As I often tell clients, until the premises are transferred nothing has been done to protect the asset from the costs of a nursing home.
Anthony J. Enea, Esq. is a member of the firm of Enea, Scanlan & Sirignano, LLP of White Plains, and Somers, New York. His telephone number is (914) 269-2367. Mr. Enea is the Chair of the Elder Law Section of the New York State Bar Association. Mr. Enea is the Past President of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA). He is a member of the Council of Advanced Practitioners of NAELA. He is fluent in Italian.