Estate Planning Isn’t Just For The Elderly

Happy, smiling couple in their sixties.

Will the Economic Recovery Act Help Protect Your Home From The Cost of Long Term Care?

By: Anthony J. Enea, Esq. *

Although the answer to the question posed above is a resounding no, I am hopeful that the title of this Article will attract your attention to a subject that is all too often neglected until a health-care crisis has occurred. During this period of economic and financial turmoil, most Americans, including a significantly large percentage of seniors, have seen their life savings, if invested in securities, real estate or with Bernie Madoff, significantly diminished. It would be truly tragic if these same seniors fail to take the necessary steps to protect their homes and savings from the cost of long-term care. The Center for Retirement Research at Boston College has recently reported that approximately two-thirds of U.S. households are at risk of being unable to maintain their standard of living when long-term care costs are considered.

Even with the recent downturn, it is not unusual for the home to be the single largest asset that one owns. In fact, as of January 2009, the median price of a home in Westchester County was reported to be $529,000.00. Thus, taking prudent steps to protect the primary residence from the cost of long term care (nursing home or home-care costs) is advisable.

For Medicaid purposes, the primary residence is known as the homestead and is an exempt asset (does not affect 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. Social Services Law ‘366(2) (a), 18 NYCRR ‘~ 360C1.4(f) The homestead can be a one, two or three family home, condo or co-op and still be exempt for Medicaid eligibility purposes but any net income is not exempt. 18 NYCRR ‘360-1.4(f), ‘360-4.3(d). However, the homestead is an asset against which Medicaid can have a lien.

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 being institutionalized and who has been a care giver to the parent; and 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 an equity interest in the home.

With respect to transfers of the homestead that are not exempt, the enactment of the Deficit Reduction Act of 2005, effective February 8, 2006 (ADRA), affected Medicaid eligibility and the transfer of asset rules in three (3) significant ways:

  1. Creation of a sixty (60) month look back period for all transfers of assets, irrespective of whether they are outright transfers or transfers to certain trusts.
  2. The penalty period (period of disqualification for Medicaid) created by a non-exempt transfer of assets will commence on the later of (a) the month following the month in which the transfer is made (as under prior law), or (b) the date on which an individual is both receiving institutional level of care (i.e., is in a nursing home) and whose application for Medicaid would be approved, but for the imposition of a penalty period at that time.Under the DRA, the penalty period for a non-exempt transfer of assets made within the sixty (60) month look back period will commence when the applicant has $13,800 or less, is receiving institutional care (in a nursing home), has applied to Medicaid for assistance, and the application would be approved but for the penalty period imposed because of the gift.

    It should be noted that, pursuant to the provisions of the DRA, and as under the prior law, no penalty period is imposed for transfers made by an applicant requesting community Medicaid (home-care Medicaid).

  3. An applicant’s Homestead (house, condo, co-op) in New York with equity above $750,000 will render an applicant ineligible for Medicaid. This provision does not apply if a spouse, child under age of 21, or a blind or disabled child resides in the house. Homeowners will have the ability to reduce their equity through a reverse mortgage or home equity loan.

Once the decision is made to transfer the primary residence to someone other than a spouse, for Medicaid planning purposes, there are generally three planning options available:

  • (a) Outright Transfer of the Residence Without the Reservation of a Life Estate. Perhaps the least desirable option available, as the transferee of the property will receive the transferor’s original cost basis in the property (original purchase price/value upon receipt plus capital improvements), and the outright transfer is a completed gift subject to gift taxes. The outright transfer of the residence would be subject to a 60 month look back period.Additionally, from a tax perspective, the use of an outright transfer of the residence results in the transferor losing the Internal Revenue Code (AIRC) ‘121(a) principal residence exclusion for capital gains of $250,000 (single person) or $500,000 (married couple) unless the transferee owns and resides in the premises for two out of the five preceding years. Any Veteran’s, STAR and Senior Citizen’s Exemptions are also lost by an outright transfer.
  • (b) Transfer of the Residence with the Reservation of a Life Estate. The DRA has significantly reduced the effectiveness of this option. Under the DRA a transfer of real property by deed with a retained life estate will create a five (5) year look back period and effectively a five (5) year period of ineligibility.The most significant problem in utilizing a deed with the reservation of a life estate results if the premises are sold during the lifetime of the transferor. A sale during the transferor’s lifetime will result in (a) a loss of the step up in cost basis that is generally available upon the death of the transferor; and (b) pursuant to Medicaid rules the life tenant is entitled to a portion of the proceeds of sale based on the value of his or her life estate. Depending on the age of the life tenant, this portion of the proceeds could be significant, and will be considered an available resource for Medicaid eligibility purposes. The existence of the possibility that the premises may be sold prior to the death of the transferor(s) poses a significant detrimental risk that needs to be explored with the client.
  • (c) Transfer to an Irrevocable Income Only Trust (a.k.a, Medicaid Qualifying Trust). As a result of the enactment of the DRA, and from a purely Medicaid Planning perspective, the use of the Irrevocable Income Only Trust remains, in my opinion, the most logical and best option. The period of ineligibility resulting from a transfer of the residence to the Trust will effectively be five (5) years. Use of the Trust will allow the residence to be sold during the lifetime of the transferor with little or no capital gains tax consequences, as it is possible to utilize the transferor’s personal residence exclusion of up to $500,000 if married, and $250,000 if single, by reserving in the trust instrument the power to the Grantor(s), in a non-fiduciary capacity and without the approval and consent of a fiduciary, to reacquire all or any part of the trust corpus by substituting property in the trust with property of equivalent value. The Grantor(s) will be considered the owner for income tax purposes. See IRC ‘675(4). Additionally, the transfer to the Trust can be structured to allow the transferee to receive the premises with a stepped up cost basis upon the death of the transferor, through the reservation of a life income interest (life estate) to the Grantor. ‘2036(a) of the IRC.The transfer of the residence to the Irrevocable Income Only Trust is a taxable gift of a future interest and, thus, the annual exclusion is not available ($13,000 per person). Full value of the premises must be reported on gift tax return. If the value is over $1,000,000, gift taxes are due.

    If a limited power of appointment is retained, the gift to the trust is incomplete (Treasury Reg. 25.2511-2(b)) and no gift tax return is technically required.

    As a result of the life income interest retained by the Grantor, on the death of the Grantor of the Trust, the date of death value of all assets in the trust will be included in the Grantor’s taxable estate pursuant to ‘2036(a) of the IRC. Inclusion in Grantor’s estate will result in a full step up in basis for all trust assets pursuant to ‘1014(e) of IRC, assuming an estate tax is still in existence at the time of the Grantor’s demise.


Irrespective of which specific measures are taken 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 premises from a potential Medicaid claim or from affecting your eligibility for Medicaid. *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.

Enea, Scanlan & Sirignano, LLP