PROTECTING THE HOME
Life estates are a simple way for many clients to preserve their homes and a cost effective alternative to trusts. Essentially, one grants a piece of real estate to him or herself for life with a future remaining interest in another, usually a family member. That remaining interest does not become vested or take effect until the death of the Grantor.
For example, a husband and wife may grant their home to themselves for life with the remainder to their daughter. The husband and wife have complete control of the property during their lives until the last to survive. At that juncture, ownership becomes vested in the daughter. Like transfers into a trust, a life estate can trigger up to 60 months of ineligibility for Medicaid. The life estate, however, has the added benefit of providing a “step-up” in basis upon the life tenant’s death, which means in our example, when the daughter acquired her parent’s home, her cost basis would be the value on the date of death of the last to survive.
Real Estate Trusts
A real estate trust is an irrevocable trust that protects the home from estate recovery. Trusts provide more flexibility than life estates but are somewhat more complicated. Once the house is in an irrevocable trust, it cannot be taken out again. It can be sold, however, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold. Later when the house is sold and the providing the Settlor (the individual who created the trust) satisfied the residency requirements, then up to $250,000 in taxable gain may be excluded; an exclusion that would not be available if the owner had transferred the home outside of the trust to a non-resident child or other third party before sale.
Permitted Transfers of the Home
Transfers to the following individuals are permitted by Medicare without affecting eligibility:
- Your child who is under age 21.
- Your child who has lived in your home for at least two years prior to your moving to a nursing home and who provided you with care that allowed you to stay at home during that time.
- A sibling who already has an equity interest in the house and who lived there for at least a year before you moved to a nursing home.
- Your spouse.
- Your child who is blind or permanently disabled.
- Into a trust for the sole benefit of anyone under age 65 and permanently disabled.