The Decision to Transfer Your Home Requires Careful Planning
By: Anthony J. Enea, Esq.
Transferring your home to a loved one may seem straightforward, but it can have significant consequences for taxes, Medicaid eligibility, and estate planning. Before making any transfer, it is important to carefully review all available options and understand the potential impact of each.
Outright Transfer of the Residence
An outright transfer of your home to another person is often the least favorable option. In most cases, the recipient receives your original tax basis in the property (generally what you paid for it, plus improvements), rather than the property’s current value. This can result in substantial capital gains taxes when the property is eventually sold.
An outright transfer is also considered a gift for tax purposes. If the value exceeds the annual gift tax exclusion amount (currently $19,000 per person per year), a gift tax return may need to be filed, and part of your lifetime federal gift and estate tax exemption may be used (currently $15,000,000 per person).
From a Medicaid perspective, an outright transfer is generally subject to Medicaid’s five-year (60-month) look-back period for nursing home Medicaid. Transfers made during this period can create a penalty period of ineligibility if Medicaid is needed.
Additionally, transferring your home outright may result in the loss of valuable tax exemptions and benefits, such as STAR, senior citizen, and veterans’ exemptions. Because of these risks, a thorough review of the tax and Medicaid consequences is essential before proceeding.
Transfer with a Reserved Life Estate
Another option is transferring the home while retaining a life estate, which allows you to continue living in and using the property during your lifetime.
One advantage of a life estate is that, upon your death, the beneficiaries generally receive a “step-up” in cost basis to the property’s fair market value at the date of death. This can significantly reduce or eliminate capital gains taxes if the property is later sold.
However, there are important drawbacks. If the property is sold during your lifetime, the life tenant’s consent is required, and a portion of the sale proceeds may belong to the life tenant equal to the value of the life estate. Those proceeds can affect Medicaid eligibility and may create tax consequences for both parties.
Additionally, the property is subject to the new owner’s creditors and may be inherited by the new owner’s beneficiaries during the term of the life estate, if the new owner predeceases the life estate holder. This could create an issue where the property is owned by an individual not originally intended.
Because of these potential complications, especially if there is a possibility the property may need to be sold during the owner’s lifetime, a life estate should be considered carefully.
Transfer to a Medicaid Asset Protection Trust (MAPT)
In many situations, a Medicaid Asset Protection Trust (MAPT) offers the greatest flexibility and protection.
Like other asset transfers, the transfer of a residence to a MAPT is generally subject to Medicaid’s five-year look-back period. However, when properly drafted, a MAPT can provide several important benefits.
The trust can be structured so that the home may be sold during the grantor’s lifetime while preserving valuable capital gains tax exclusions, including the personal residency exclusion of $250,000 for a single individual or $500,000 for a married couple. In addition, the trust can be designed so that beneficiaries receive a stepped-up cost basis upon the grantor’s death, reducing future capital gains taxes.
A properly drafted MAPT can also help protect the residence from future long-term care costs while allowing the grantor to maintain certain rights and flexibility.
For these reasons, a MAPT is often the preferred planning tool for individuals seeking both Medicaid protection and favorable tax treatment.
Conclusion
The decision to transfer a residence should never be made without fully understanding the legal, tax, and Medicaid implications. Whether the transfer is made outright, through a life estate, or to a Medicaid Asset Protection Trust, each option carries unique advantages and risks.
Careful planning and professional guidance can help ensure that the chosen strategy accomplishes the client’s goals while avoiding unintended consequences for both the client and their loved ones.
Anthony J. Enea, Esq. is the managing member of Enea, Scanlan and Sirignano, LLP of White Plains and Somers, NY. He focuses his practice on elder law, wills, trusts and Estates. Mr. Enea is the Past Chair of Elder Law and Special Needs Section of the New York State Bar Association (NYSBA). He is the Past Chair of the 50+ Section of the NYSBA. He is the Past President and Founding Member of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA). He is the Past President of the Westchester County Bar Foundation and a Past President of the Westchester County Bar Association. He is Certified as an Elder Law Attorney by the National Elder Law Foundation as accredited by the American Bar Association.
Mr. Enea Can be reached at (914) 948-1500 or through our website at www.esslawfirm.com.
