Many people wonder whether they should transfer real estate, usually their home, to their children or another close relative as a protection against possible future long-term care expenses. Given the high cost of long-term care and that the home is often people’s most valuable asset, this thought is common. However, there are many factors you should consider.
You may have heard that you have to spend down essentially all of your money and property before you will be eligible for MaineCare’s (Maine Medicaid’s) long-term care programs. MaineCare eligibility is a complex issue in general, but it is straightforward regarding personal residences. In 2015, up to $828,000 of equity in a personal residence is exempt during the MaineCare recipient’s lifetime. The exposure occurs after the MaineCare recipient’s death if he or she dies after age 55 and is not survived by a spouse or a child with disabilities. Therefore, preserving the value of a personal residence is not related to benefit eligibility; it protects an unmarried person’s estate against recovery by DHHS for its actual cost of care after death. Should you give your home away before you need long-term care?
First, if you transfer your property to someone outright with simply a deed and the “understanding” that you will continue to live there, you are at risk of eviction. While you may think that your child or friend would never do that, it indeed happens. But if you and your “landlord” sign a life lease, you can reserve your right to use and occupy the property as well as outline all of your respective rights and responsibilities. For MaineCare purposes, this needs to be structured as a life lease and not as a life estate. A life lease can also preserve the step-up in basis of your property’s value, which, if it is not transferred again during your lifetime, is potentially a valuable tax protection for your heirs.
There are some issues that cannot be resolved with an outright transfer, even with a life lease, and it is a matter of balancing the various risks and deciding what it is best for you. If you transfer property for less than fair market value within five years of applying for MaineCare’s long-term care programs, that gift creates a period of ineligibility. If the child who received the property transfers it back, this should cure the penalty; but, any debts, divorce, or lawsuits of the child that have occurred in the meantime may prevent it. Some people may believe that an ineligibility period will not affect them, because they have long-term care insurance to private pay in the interim, but the type and amount of coverage and any deductible need to be considered. Also, if the property is sold during your lifetime, unless the person who received the property uses it as a personal residence, neither of you will be able to claim the personal residence exclusion from capital gains tax. Additionally, you will lose access to equity and the ability to have a reverse mortgage. Weighing these issues, you may conclude that transferring the property to an asset protection trust would be more appropriate than an outright transfer.
Some people also wish to make a property transfer to avoid probate. Probate in Maine is simpler and less expensive than in many other states. But, if there is a reason this goal applies to you, you should work with an estate planning or elder law attorney to ensure that your assets are structured such that all of them will pass outside of the probate process, not just your home. But keep in mind that when the home is owned in a revocable living trust, it is no longer an exempt asset.
There may be additional factors to consider in your particular situation, including any loans on the property. Before transferring your home away from yourself, you should meet with an elder law attorney to discuss the risks and benefits and how best to structure the transfer to address all considerations