The decision to transfer one's residence is often an integral part in asset protection and wealth preservation planning. This is especially true if there is concern that long term care costs (nursing home and/or home care) may dissipate his or her life savings in the future. Every potential transfer of one's home raises issues regarding estate and gift taxes, capital gains taxes, as well as Medicaid eligibility. While the following provides insight regarding the various types of transfers available (and their consequences), a thorough review of all options should be made with an experienced elder law attorney prior to making a final selection.
Outright Transfer of the Residence without the Reservation of a Life Estate Perhaps the least desirable option, the transferee of the property will, in this scenario, receive the transferor's original cost basis in the property (original purchase price plus the amount of any capital improvements made). The outright transfer is also a completed gift that is subject to gift taxes. For Medicaid eligibility purposes, the outright transfer of the residence would be subject to a 60-month look back period. This means the transferor and his or her spouse would be disqualified for nursing home Medicaid (not Medicaid homecare) for five years. From a tax perspective, the use of an outright transfer of the residence results in the transferor losing the Internal Revenue Code principal residence exclusion for capital gains (income tax) purposes ($250,000 for a single person or $500,000 for a married couple). With the federal capital gains tax rate with the Medicare surtax being approximately 24%, the income tax impact could be substantial. Any veteran's, STAR, and/or senior citizen's exemptions would also be lost.
Transfer of the Residence with the Reservation of a Life Estate
If the transfer of the residence were made within an existing Medicaid look back period (60 months), the period of ineligibility would not commence until the applicant was receiving institutional care in a nursing home. Thus, a transfer of real property by deed with a retained life estate (the right to the use and possession) will also require that the transferor not apply for nursing home Medicaid within the five-year look back period. This scenario does permit the transferee to receive a full step up in his or her cost basis in the premises to its fair market value on the transferor's date of death since the residence is includible in the deceased's gross taxable estate. The most significant problem resulting from this type of transfer occurs if the premises are sold during the lifetime of the transferor. In such a case, the transferee will be subject to a capital gains tax on the sale with respect to the value of the remainder interest being sold (difference between transferor's original cost basis, including capital improvements, and the sale price). In addition, the life tenant is entitled to a portion of the proceeds of the sale based on the value of his or her life estate. This portion may be significant and will be considered an available resource for Medicaid eligibility purposes.
Transfer to a Medicaid Asset Protection Trust (AKA: Irrevocable Income Only Trust)
The use of the Medicaid Asset Protection Trust (MAP) is often the most logical option purely from a Medicaid planning perspective. While the period of ineligibility will effectively be five years, a properly drafted MAP trust will allow the residence to be sold during the lifetime of the transferor with little or no capital gains tax consequences. The transferee can utilize the transferor's personal residence exclusion ($250,000 if single or $500,000 if married). Additionally, the transfer can be structured to allow the transferee to receive the premises with a stepped up cost basis upon the death of the transferor. It should be noted that the transfer of the residence to the MAP trust is a taxable gift of a future interest with no annual exclusion available. Full value of premises reported on gift tax return. While the tax advantages and continued flexibility of the MAP trust make it an ideal option in many cases, it is still critical to examine and weigh all of the aforementioned options before proceeding with a transfer of real property. In a matter of such importance, making an informed choice is essential.