When someone is facing long-term expenses, particularly for a skilled nursing facility (nursing home), the family may plan to apply for Medicaid to pay the bill. Without the proper knowledge, homeownership and Medicaid can be a nightmare. The challenges begin when homeowners don’t do any Medicaid planning and decide the best answer is simply to gift their home to their children. Beck & Lenox Estate Planning and Elder Law has seen the problems that result. It doesn’t always work out well for the homeowners or their children, warns the article “Owning real estate without jeopardizing Medicaid paying for nursing home” from limaohio.com.
A key tax avoidance opportunity is usually missed, when real property is gifted outright. The IRS says that if someone owns real estate, when that person passes, the heirs may eliminate a large portion of the taxable gains, if the real estate ends up being sold by an heir for more than the original owner paid for the property.
Let’s walk through an example of how this works. Let’s say Terry buys a farm for $1,000. The cost to buy the farm is referred to as a “tax basis.”
If the family is planning for the possibility of nursing home costs, Terry might want to give that farm away to her children Ted and Zach. She needs to do it at least five years before she thinks she’ll need Medicaid to pay for long-term nursing care, because of a five-year lookback.
When Terry gifts the farm to Ted and Zach, the two children acquire Terry’s tax basis of $1,000. Ted gets $500 of the tax basic credit, and so does Zach.
The years go by and Ted wants to buy out Zach’s half of the farm. The farm is now worth $5,000. So, Ted pays Zach $2,500 for Zach’s half of the farm. Zach now has a tax basis of $500, which is not subject to tax. And Ted receives $2,000 more than his $500 tax basis, and Ted will need to pay capital gains on that $2,000 gain.
It could be handled smarter from a tax perspective. If Terry owns the farm when she dies, then Ted and Zach get the farm through her will, trust or whatever estate planning method is used. If the farm is worth $3,000 when Terry dies, then Ted and Zach will get a higher tax basis: $3,000 in total, or $1,500 each. By owning the farm when Terry dies, she gives them the opportunity to have their tax basis (and amount that won’t be taxed if they sell to each other or to anyone else) adjusted to the value of the property when Terry dies. In most cases, the value of real estate property is higher at the time of death than when it was purchased initially.
As stated above, homeownership and Medicaid can be a nightmare. However, there’s another way to transfer ownership of the farm that works even better for everyone concerned. In this method, Terry continues to own the farm, helping Zach and Ted avoid taxes, and keeps the property out of her countable assets for Medicaid. The solution is for Terry to keep a specific type of life estate in the farm. This needs to be prepared by an experienced estate planning attorney, so that Terry won’t have to sell the farm if she eventually needs to apply for Medicaid for long term care.
Now, here is a totally different scenario: Terry owns the farm and goes into the nursing home without doing any planning. After she dies, the state may mandate the recovery of the funds the government paid for her care. Unless…one of her sons lived with her for 2 or more years prior to her entering the nursing home. If the son was helping to take care of Terry, and without his help, she would have had to go into the nursing home much sooner, that would save the farm for her sons. It would be very important to note that living arrangement when Medicaid is applied for, and that would keep the state from recovering those funds.
Your estate planning or elder law attorney will be able to help you and your family navigate protecting your home and other assets, while benefiting from smart tax strategies. Don’t let homeownership and Medicaid be a nightmare for you. Beck and Lenox recommends you find a good elder law attorney to help you by checking online at naela.org.
Reference: limaohio.com (Nov. 7, 2020) “Owning real estate without jeopardizing Medicaid paying for nursing home”