The cost of care in a nursing home or other long-term care facility is high and continues to rise. If you ever need nursing home care, the Medicaid program will help you pay for it—after you “spend down” your assets to the point where you qualify for benefits. You likely won’t have to sell your home in order to qualify for Medicaid, but Medicaid can make a claim against your estate after your death to recover funds it expended on your behalf. This process, called estate recovery, may result in a claim against your house. Can you protect your house from Medicaid by giving it to your adult children?
The answer is a definite maybe. There are some circumstances in which you can transfer your home to an adult child to keep it out of the clutches of Medicaid. However, there are better ways to protect this cherished asset, and at least a few very good reasons you may not want to transfer it to your children.
The Medicaid Look-Back Period
As you’re probably aware, under Michigan’s Medicaid rules, there is a five year “look-back” period. If you transferred assets to anyone, including a family member, for less than their fair market value during the five years before you applied for Medicaid, your application may be rejected or your eligibility for benefits delayed just when you need them most. The look-back period is designed to prevent people from impoverishing themselves on paper in order to qualify for benefits—in other words to prevent them from defrauding the government.
There are some people, under some circumstances, to whom you can transfer your home without incurring a penalty. These include:
- Your spouse
- A disabled or blind child
- A child under the age of 21
- A caretaker child. A caretaker child is defined as a child of the Medicaid applicant who lived in the home for two years or more prior to the applicant’s move to a nursing home and whose care for the applicant delayed the need for nursing home care. (Speak with an elder care attorney to be sure your child qualifies under this standard.)
- Your sibling who already has an equity interest in the house and lived in the house during the year immediately preceding your nursing home admission
- Into a certain type of trust for the exclusive benefit of a disabled individual under age 65
You may be thinking to yourself that you don’t expect to need nursing home care for at least five years or more, and you know you want your children to have the house eventually. So why not transfer it early to avoid the scrutinizing eye of the government? One reason is that if you have an unexpected illness or injury, you could wind up needing long-term care a lot sooner than you think. The other reason is that transferring the house too early could hurt your children financially.
The Tax Downside of Transferring Property to Your Kids
When your children inherit property from you after your death, they receive a “stepped up” tax basis, which benefits them when it comes time to sell the house. The step up in basis means that their basis in the house is its current value. Why is this important? Because they will pay capital gains on the difference between the selling price of the house and the tax basis (assuming the selling price is higher).
If you transfer the house to your kids before death, they do not receive a step up in basis; instead, their basis is whatever you paid for the house.
If you transfer the house to your kids before death, they do not receive a step up in basis; instead, their basis is whatever you paid for the house. Let’s say you bought your house in 1980 for $50,000. You give it to your children in 2017. If they sell it in 2025, for $300,000, they will pay capital gains tax on the difference, or $250,000.
To compare, imagine that you do not transfer the house, but that the children inherit it from you in 2020, when it’s worth $275,000. They sell it five years later, for $300,000. They will pay capital gains tax only on the $25,000 increase in value since they inherited it.
The only way that your child or children can avoid capital gains taxes when they sell your house is for them to live there for two years or more before they sell it. If they do so, they are able to exclude up to $250,000 for an individual, or $500,00 for a couple, from taxes. This option is often not feasible for children who have homes and commitments elsewhere.
Giving Up Ownership Means Giving Up Control
You can transfer your house to your children in the hope that they will maintain it as you did or the expectation that they will do with it what you tell them to do. The reality is that once your children own the house that you lived in, they have the legal right to do whatever they want with it, including sell it. You may be confident that they wouldn’t disobey you, but if you turn out to be wrong, you won’t have a leg to stand on from a legal standpoint.
Even if your children have the best of intentions, the house could still be at risk. If they own it, it will be vulnerable to their creditors if they are sued. If they get divorced, depending on the circumstances, the house could be considered marital property and end up in the hands of your child’s ex-spouse.
There are good reasons not to try to protect your house from Medicaid by transferring it to your adult child or children. Indeed, there are better ways to accomplish this goal without subjecting yourself or the property to risks outlined in this article, including the use of specialized irrevocable trusts, Ladybird type deeds, etc. Consult an elder law attorney to discuss these and other options that may be better for your needs.
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