PROTECTING THE HOME FROM THE COST OF LONG-TERM CARE
by: Begley Law Group
By: Thomas D. Begley, Jr., CELA
The most important asset for most Americans is their home. They have worked hard, paid off a mortgage, and enjoyed many happy times in their home. They do not want to lose it. Seventy percent of Americans will require some form of long-term care be it nursing home, assisted living or home care. The cost of this care can range from $20 per hour or more for home care to $10,000 – $12,000 per month for nursing home care. Before becoming eligible for Medicaid in a nursing home or assisted living facility, an individual must list their home for sale and if it does not sell during the individual’s lifetime, Medicaid will place a lien on the home on death. If the individual is receiving home care paid by Medicaid, then he or she will not have to sell the home at that time, but it will be subject to estate recovery on death.
COST OF CARE AND METHODS OF PAYMENT
The cost of long-term care ranges from $20 per hour or more for home care, or $5,000 to $7,000 per month for a live-in, or $4,500 to $8,500 per month for assisted living, or $10,000 to $12,000 per month for nursing home care. There are only five ways to pay for care:
♦ Private pay. The individual simply pays out of pocket for whatever care is needed.
♦ Long-Term Care Insurance. Only about 8% of Americans have long-term care insurance. It is expensive and cannot be obtained once an individual fails a medical test.
♦ Medicare. Medicare pays very little for home care, nothing for assisted living, and a maximum of 100 days in a nursing home, if the individual qualifies. Very few people receive the maximum nursing home benefit.
♦ Veterans. Qualified Veterans and spouses of Veterans may be eligible for placement in a federal Veterans nursing home, but priority is given to Veterans with service-connected disabilities of 70% or more. The State of New Jersey has three nursing homes. One is in Vineland, one is in Edison, and one is in Paramus. Also, there is a program known as Aid and Attendance, which pays Veterans or spouses of Veterans, who are financially and medically eligible, a monthly check ranging from $1,149 per month for a spouse of a deceased Veteran to $2,120 per month for a Veteran with one dependent. While this is very helpful, it only pays for a limited amount of care.
♦ Medicaid. Medicaid pays for the lion’s share of long-term care in this country. In order to be eligible for Medicaid, there are four basis tests: (1) the individual must pass a medical test indicating that they need the care, (2) there is an income test, but this test can usually be satisfied through use of a Miller Trust, even if the individual exceeds the income cap, (3) the individual cannot have made gifts within five years of applying to Medicaid, and (4) there is an asset test. A single person cannot have more than $2,000 of assets, and a married couple cannot have more than $121,240 of assets in 2015. If the individual is single, the home must be listed for sale and the proceeds used for care. If the individual is married, the sale of the home can be deferred, but Medicaid will place a lien upon the property on the death of the Medicaid recipient.
THE WRONG SOLUTION – TRANSFER TO CHILDREN
The typical strategy to protect the home is to deed it to a child or children. The individual then waits five years and applies for Medicaid.
♦ Risk Factors. One problem with this strategy is that there are risk factors. If the home is transferred to a child, the home could be lost, in whole or in part, if:
- Creditors. The child has creditors who sue the child. Since the home is in the name of the child, the creditor would have a lien against the home;
- Divorce. The child winds up in a divorce. The home could be subject to equitable distribution. Many family lawyers also advise that even if the home is only in the name of the child, and not the name of both spouses, it is not a good idea to transfer the home to a child because the judge will often find something else to give to the child’s divorcing spouse; or
- Public benefits. The child is on public benefits and the transfer may cause the child to lose those benefits. For example, if a child is receiving SSI and the parent transfers the home to that child who does not occupy it as his or her principal residence, then the home would be a countable assets causing the SSI recipient to lose SSI and SSI-linked Medicaid.
♦ Tax disadvantages. There are also significant tax disadvantages to transferring a primary residence to a child.
♦ Control. If the child or child’s spouse is unscrupulous, the child could conceivably sell the home out from under the parent or mortgage the home and obtain funds for the child’s own benefit. If the child dies after receiving the home but before the parent dies, the child’s will may leave the home to the child’s spouse, who may or may not have a good relationship with the parent.
- Capital gains tax. If a parent gives the house to the child, the parent’s cost basis carries over to the child. Cost basis is the amount the parent paid for the home, plus any improvements. If the parent paid $200,000 for a home many years ago and it is now worth $400,000, the $200,000 cost basis carries over to the child. If the child then sells the home, he or she must pay capital gains tax on the $200,000 profit. Assuming a combined federal and state capital gains rate of 25%, the tax would be $50,000.
- Section 121 exclusion. If the parent sells the same home during the parent’s lifetime, he or she has a $250,000 exclusion from capital gains tax, if single, and a $500,000 exclusion, if married. Therefore, if the parent were to sell the home and transfer the proceeds of sale from the house, the capital gains tax on the $200,000 could be saved.
- Step up in basis. If the parent dies and leaves the home to the child, the child receives a “step up” in basis, which means that the child’s basis becomes the fair market value of the home on the parent’s death. Let’s suppose the home is still worth $400,000 on the parent’s death. Now the child’s basis would step up to $400,000, and if the child sold the home right away, there would be no gain and no capital gains tax. Even if the child does not sell the home right away, he or she benefits later. The property would be appraised at the parent’s date of death, and that value would be used when the child sells the home. Suppose the property appraises at $400,000, but the child does not sell it for a year or so and then receives $450,000. The child would only have to pay tax on the $50,000 gain. Without the step up, the child would have to pay the tax on a $250,000 gain.
THE RIGHT SOLUTION – TRUST
A better solution would be to transfer the home to a trust for the benefit of the child.
♦ Primary residence exclusion. The trust could be designed so that the parent maintains the principal residence exclusion, if the house is sold during the parent’s lifetime. The trustee would sell the home, the proceeds would remain in the trust, and the trust could even buy a new home.
♦ Step Up in basis. If the home is not sold during the parent’s lifetime, the trust can be designed so that the children receive a step up in basis on the parent’s death.
♦ State real estate taxes. Real estate tax benefits can be preserved by proper language in the deed. This could be done either by reserving a life estate or a right to use and occupy. A life estate is almost never a good idea, because if the property is sold the parent would be entitled to a portion of the proceeds of sale which would disqualify the parent from Medicaid. A reservation of a right to use and occupy is sufficient to preserve most state real estate tax benefits.
♦ Risk factors. All of the risk factors listed above can be eliminated by transferring the home to the trust rather than the child. If the grantor names a child as trustee of the trust and the child is sued by a creditor, the judgment will not affect the home because the child does not own the home. He or she is simply acting in a fiduciary capacity. If the child is serving as trustee and becomes divorced, the fact that the child is serving in a fiduciary capacity should have no impact on the divorce settlement. If the home is transferred to a trust for the benefit of a child with disabilities who is receiving public benefits, then the transfer to the trust will not affect the child’s public benefits because the trust can be drafted as a special needs trust.
♦ Homeowner’s and flood insurance. In transferring the home either to the children or the trust, it is important to obtain a change of ownership endorsement on the homeowner’s insurance policy. Otherwise, the home will be without insurance. It is also important to change the ownership endorsement on the flood insurance, if the home is in a flood zone.
♦ Title search. If there is any question as to whether there are liens against the property, consider obtaining a title search or title insurance.
There is a 60-month lookback for transfers. This means that on the application for Medicaid benefits, there is a question which asks if there have been any transfers made to an individual or to a trust within the previous 60 months. All such transfers must be disclosed to Medicaid. Failure to do so constitutes Medicaid Fraud which is a criminal offense.
A transfer of assets does result in a penalty. The penalty begins on the later of:
- Transfer. The date of the transferOR
- Income. The date that the applicant is income eligible for Medicaid
- Resources. The date the applicant has assets not exceeding $2,000
- Medicaid Application. The date the Medicaid application has been filed
- Medically Eligible. The date the applicant was medically eligible.
- Penalty. There is no other outstanding penalty.
New Jersey has amended its estate recovery law, N.J.S.A. 30:4D-7.2. Under this legislation, the state is given the right to recover from the estate of a deceased Medicaid recipient a sum of money equal to the amount expended on behalf of the Medicaid recipient. The definition of an estate has been broadened to include a life estate. However, the Medicaid Estate Recovery Unit has interpreted the statute to apply only to life estates created by will rather than by deed.
REAL ESTATE TAX CONSIDERATIONS
In deeding a home and reserving a right to use and occupy, there are certain real estate tax considerations:
♦ Homestead tax rebate. By reserving a right to use and occupy, the parent will be paying the real estate taxes and be entitled to continue to receive the Homestead Tax Rebate N.J.A.C. 18:12-7.1(b)8i. Eligibility requirements are:
- The parent own and occupy the home in New Jersey as his/her principal residence on October 1st of the previous calendar year, and
- The parent has a gross income for the previous calendar year of $150,000 or less, if the parent is age 65 or over or blind or disabled, or the parent has gross income for the previous calendar year of $75,000 or less if the parent is under age 65 and not blind or disabled, and
- The home must be subject to local property taxes and taxes must have been paid.
♦ Senior citizen’s deduction. Since the parent would be reserving a right to use and occupy and be paying the real estate taxes, the parent is entitled to continue to receive any Senior Citizen’s Deduction which the parent might now be receiving. N.J.A.C. 18:14-1.1 and N.J.A.C. 18:14-2.8. The requirements for this deduction are:
- New Jersey resident,
- Income less than $10,000,
- 65 or older, and
- 100% permanent disability.
♦ Income tax deduction for real estate taxes. Since the parent is an owner of the property by virtue of the parent’s right to use and occupy and the parent is making payment of the real estate taxes, the parent may continue to deduct those taxes on the parent’s federal income tax return I.R.C. §164(a); Reg. §1.164-1(a).♦ Veteran’s deduction. Since the parent would be reserving a right to use and occupy and will be paying the real estate taxes, the parent is entitled to continue to receive the Veterans’ deduction. Handbook for New Jersey Assessors, Section 304.26, Number 5, Chapter 3, Page 38. To be eligible the parent must:
- be a citizen or resident of New Jersey,
- have been honorably discharged or released, and
- have been in active service in time of War.
The benefit is also available for the Veteran’s unmarried surviving spouse/surviving civil union partner/surviving domestic partner.
♦ Veteran’s exemption. A veteran is fully exempt from payment of real estate tax if the following requirements are met:
- served during wartime,
- honorable discharge or dismissed under honorable conditions,
- rated 100% service-connected disability by the VA, and
- disability is not temporary or the result of hospitalization, surgery or recuperation.
The rebate is also available to the surviving spouse when the veteran was receiving the exemption or would have been eligible if the exemption had been filed.
♦ Tax freeze. The parent would be entitled to participate in the New Jersey Property Tax Freeze. The requirements are as follows:
- The parent is a New Jersey resident and citizen 65 years or older, or receiving SSD benefits,
- The parent lived in New Jersey continuously for a period of ten years as a homeowner or renter,
- The parent owned and lived in this parent’s home for at least three years,
- The parent paid all taxes due for base year and each year up to the year for which the reimbursement is claimed, and
- The parent’s income is $70,000 or less (whether single or married).
In conclusion, it is always better to transfer a home to a trust rather than to a child. The only exception would be a transfer to a caregiver child. A transfer for the benefit of the disabled child can be made through a disability annuity trust or a disability annuity special needs trust, if the child with disabilities is receiving SSI or other asset-based public benefits. It is also almost always better to reserve a right to use and occupy rather than a full life estate.