Protecting Your Life Savings

PROTECTING THE PRIMARY RESIDENCE
FROM THE COST OF LONG TERM CARE 

*By Anthony J. Enea, Esq.

As a result of the average cost of a home in Westchester County being close to $700,000, it is not unusual for the primary residence to be the most valuable asset one owns. Thus, taking prudent steps to protect the primary residence from the cost of long term care (nursing home or home care costs) 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 eligibility purposes, however, any net income is not exempt. While the homestead is an exempt asset for eligibility purposes, it is still an asset against which Medicaid can have a lien for Medicaid which has been properly paid. 

Under certain circumstances, the homestead can be transferred without having any effect on one's eligibility for nursing home Medicaid. For example, the homestead can be transferred to five (5) categories of individuals without effecting Medicaid eligibility:

Spouse;

Minor Child;

Disabled or blind child of any age;

Adult child who has lived in the home of the parent for at least two years prior to the parents institutionalization and who has been a caregiver to the parent.

In recent years, I have found this to be an effective planning option. For a variety of socio-economic reasons, it is not unusual for an adult child to be residing with his or her parents. Additionally, the "caregiver" requirement has been loosely defined by Medicaid.

A sibling of the Medicaid applicant who has resided in the home for at least one year prior to the institutionalization and who has an equity interest in the home.

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. For example, should the homestead be transferred with the reservation of a life estate by the transferor, or should the transfer be made outright or to an irrevocable trust. These are issues that need to be fully explored. 

A non-exempt transfer of the homestead with the retention by the transferor of a life estate in the transferred property often gives the transferor the comfort of knowing that he or she will have the legal right to remain in the premises for the remainder of his or her life. Additionally, the penalty period for Medicaid created by the transfer would be determined by subtracting from the fair market value of the home the monetary value attributed to the life estate retained by utilizing the tables of the Health Care Financing Administration of the United States (HCFA). Dept. of Health and Human Services Health Care Finance Administration State Medicaid Manual Transmittal No. 64. The reservation by the transferor of the life estate, will also allow the transferee to receive a full step up in the cost basis of the property to its fair market value on the date of the life tenant's death. However, if the premises are sold prior to the life tenant's demise, there may be capital gains tax consequences to the transferee. Additionally, the transferor would have to be compensated for the value of the life estate he or she relinquished because of the sale, which would have an impact on his or her Medicaid eligibility.

Another commonly utilized Medicaid planning option relevant to protecting the primary residence is the transfer of the residence to an irrevocable trust. Title to the premises is deeded to the trustees of the trust and the transferors are granted the right to reside in the premises for their lives. A transfer of the homestead to an irrevocable trust would create a period of ineligibility for Medicaid equal to the fair market value of the residence divided by the monthly average cost of nursing home care in the County where the applicant resides. 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. The principal residence exclusion for capital gains tax purposes and any real property tax exemptions will still be available to the transferor.

Irrespective of which specific measures are taken to protect the primary residence, the critical element is that some steps be taken. Until the premises are transferred nothing has been done to protect the asset from the potential costs of long term care.

*Anthony J. Enea, Esq. is a member of the firm of Enea, Scanlan & Sirignano, LLP. with offices in White Plains and Somers, New York.  Mr. Enea is certified as an Elder Law Attorney by the National Elder Law Foundation as accredited by the American Bar Association.*  Mr. Enea is the founding Co-Chair of the Elder Law Committee to the Westchester County Bar Association.  He is a member of the Executive Committee of the  Elder Law Section of the New York State Bar Association as Co-Chair of the Guardianship and Fiduciary Committee, a member of the Long Term Care Reform Committee of the Elder Law Section, a Vice-Chair of the Committee on the Elderly and Disabled of the Trusts and Estates Section of the New York State Bar Association, and a member of the National Academy of Elder Law Attorneys.  Mr. Enea is also fluent in Italian.

*The National Elder Law Foundation is not affiliated with any Governmental authority.  Certification is not a requirement for the practice of Law in the State of New York and does not necessarily indicate greater competence than other attorneys experienced in this field of law.

IRS Circular 230 Disclosure: In order to ensure compliance with IRS Circular 230, we must inform you that any U.S. tax advice contained herein and any attachments hereto is not intended or written to be used and may not be used by any person for the purpose of (i) avoiding any penalty that may be imposed by the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.