You may be worried about losing your home if you need to enter a nursing home and apply for Medicaid. While this concern is valid, transferring your home to your children is not the best way to protect it.
Although you typically do not have to sell your home to qualify for Medicaid coverage of nursing home care, the state could file a claim against your house after you pass away. If Medicaid helps pay for your nursing home care, the state is required to attempt to recover from your estate the benefits it paid on your behalf. This process is called "estate recovery." To protect your home from this, you might be tempted to give your hometo your children. However, there are three major reasons why this might not be the best option:
1. Medicaid Ineligibility. Transferring your home to your children or anyone else could render you ineligible for Medicaid for a period of time. The state Medicaid agency reviews any transfers made within five years prior to your Medicaid application. If you transferred the property for less than market value during this period, you may face a penalty period during which you won't be eligible for benefits. Depending on the home's value, this penalty could last for years and Medicaid wouldn’t begin until you're nearly out of funds.
However, there are specific circumstances where you can transfer your home without penalty. Consulting a qualified elder law attorney is essential before making any transfers. For instance, you can transfer your home without incurring a penalty to:
- Your spouse
- A child who is under 21, blind, or disabled
- A trust for the sole benefit of a disabled individual under 65
- A sibling who has lived in the home and has an equity interest in it
- A "caretaker child" who lived with you for at least two years before your institutionalization and provided care that allowed you to avoid a nursing home stay
- Children, siblings, etc. if the deed is an enhanced life estate or Transfer on Death deed and the Medicaid applicant signs a statement that they intend to return to the home
2. Loss of Control. When you transfer ownership of your home to your children, you relinquish control over it. Your children can make decisions about the property without your consent. Additionally, if your children face lawsuits, divorce, or debt, your home could be at risk from their creditors.
3. Adverse Tax Consequences. Inherited property receives a "step-up" in basis when you pass away, meaning the tax basis becomes the current market value of the property. However, if you gift the property to your child, the tax basis remains what you originally paid for the home. If your child later sells the house, they could face capital gains taxes on the difference between the original tax basis and the selling price. To mitigate some or all of these taxes, the child would need to live in the house for at least two years before selling it, allowing them to exclude up to $250,000 ($500,000 for a couple) of capital gains from taxes.
Before making a major decision regarding your home, it’s important to discuss your options with one of our experienced attorneys at Theander & Grimes. We specialize in estate planning and can guide you through the complexities of Medicaid planning and asset protection.
Schedule your initial consultation with Theander & Grimes by calling (281) 968-9965 today or contact us online.