“I Want to Protect My Home”

By Marianne Johnston, Esq.

Those are the first words out of the mouths of many of our clients when we discuss long-term care planning.  The value of the primary residence is often a substantial portion of a person or couple’s worth.  Parents wish to preserve the value of that asset for their children. There are steps that may be taken now to accomplish this goal.

Why should I take this action?  Long-term care is expensive no matter the setting and studies show approximately 70% of us will need some form of long-term care before we die. The cost of care provided by a home health agency currently averages $28 to $30 per hour while the monthly cost of assisted living facilities averages between $6,500 to $11,000 with nursing homes costing from $ 12,000 to $16,000 per month.  There are no signs these staggering costs will decrease in the future.  In New Jersey, Medicaid will pay for care in all three of these settings but receiving such benefits may put one’s home at risk.

If a single Medicaid applicant moves into a long-term care facility, Medicaid will require the house to be listed for sale and sold at fair market value with the proceeds being spent down until the person’s resources are below $2,000.  If the spouse of a Medicaid applicant resides in the applicant’s home, the house will not have to be sold but Medicaid will place a lien on the property after the couple passes away.  By placing a lien on the property, Medicaid seeks to recover the amount it paid out in benefits on behalf of the ill or disabled spouse.

What can I do?  A parent may consider transferring their residence to an irrevocable trust for the benefit of their children while reserving the right to use and occupy the property for the parent’s lifetime.  The home cannot be sold without the parent(s)’ consent.  The parent(s) still has the obligation to pay maintain costs and property taxes so any eligibility for senior freeze or other discounts is preserved.  Upon the death of the parent(s), the children will receive a step up in cost basis thus reducing if not eliminating any capital gains tax obligation upon their sale of the property.

Why not transfer my residence directly to my children?  A parent incurs risks in making a direct transfer of their home to their children.  For example, the house can be sold without the parents’ permission.  Additionally, the residence becomes subject to the claims of the children’s creditors. Moreover, If the home has appreciated in value since the parent purchased the property, a direct transfer may cause the children to face a hefty capital gains tax down the road.

Keep in mind the original transfer of the home into the Children’s Trust is subject to penalty if a parent applies for Medicaid benefits within five years of making the transfer.  After five years has passed, Medicaid would not penalize the transfer or consider the property in the trust an available asset of the parent. Upon the death of the parent, the property in the trust would not be subject to any Medicaid lien.

Contact a professional at Begley Law Group if you have any questions or want to get started protecting your most valuable asset today.