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April 13, 2006
PROTECTING THE HOME
For those of you that have not been following my weekly column, new Medicaid (MassHealth) rules were signed into law on February 8, 2006 by President Bush that limit your ability to protect your home if you or your spouse needs nursing home care.
There are a couple other things that you should also be aware of; First, Massachusetts has not yet issued the emergency regulations to implement the changes made by the Deficit Reduction Act. Until these regulations are issued, we are still working under the “old” law. However, once these regulations are issued, they will probably be applied retroactively. The Second thing to remember is that the Deficit Reduction Act is being challenged in court to determine its constitutionality. There was an error in transcribing the Deficit Reduction Act when it went from the Senate to the House. This error resulted in the House passing a bill that has $2 billion more in spending than the version that passed the Senate. Many constitutional experts believe that this error results in the budget, known as the Deficit Reduction Act, being unconstitutional.
Historically, there have been 3 common methods of protecting your home if you need nursing home care. They are:
· Gifting the property to your children.
· Creating a Life Estate.
· Creating a Trust.
Prior to the Deficit Reduction Act, gifts were subject to a 3-year look-back period. If a trust was used, it extended the look-back period to 5 years. If the elder wanted to protect her home and her health was not that great, trusts were generally avoided because of the increase in the look-back period from 3 to 5 years.
Under the Deficit Reduction Act, all gifts are now subject to the 5-year look-back period, whether or not a trust is used. The other change that hurts seniors is the delay in the start date for the disqualification period. For most seniors, the delay in the start date means that, in order to protect the home, it must be transferred more than 5 years before they get sick and need nursing home care. Advance planning is now more important than ever.
I’m sure that you have all read stories about “Grandma” giving her house to “Grandson” to protect it in the event she goes to a nursing home. Soon thereafter, “Grandma” is on the street because “Grandson” sold the home. It is for this reason alone that this is the least favored method of protecting the home.
A life estate is a deed, transferring your home to your children, and reserving your right to occupy the property for the rest of your life. Because you are retaining the right to occupy the property for the rest of your life and only giving away the “remainder interest” the disqualification period is always shorter than by just giving away the whole property. This reduction in the disqualification period has been eliminated under the Deficit Reduction Act because all gifts are now subject to the 5-year lookback period.
The other potential problem with Life estates is that back in 2003, Life Estates were subject to the Expanded Estate Recovery rules. These rules said that if you had a life estate and had to go to a nursing home, the state could put a lien on the real estate up to the “value” of the life estate. These rules were repealed but we are always concerned that they will come back. New Hampshire just recently started putting liens on Life Estates.
Transferring your home to a trust is now the preferred method of protecting your home. The maximum disqualification period has not changed under the new law. We are still subject to the 5-year lookback period. Benefits of using the trust are as follows:
· Sale of Home – If the home is sold, the proceeds are paid to the trust. The sale would be eligible for the $500,000 gain exclusion ($250,000 for single individuals). If you were downsizing to a smaller home or condo, the trust could buy the new home and the protection continues, uninterrupted.
· Sell Tax Free – After your death, the property receives a step up in basis and you heirs can sell tax-free.
But before you go ahead and place your property in a trust, you should think of your other options. To some, protecting the “home” as their children’s inheritance is the first priority. For others, having the equity in their home is considered their pool of money that they could access if they got sick and needed care at home. Keeping your home in you own name with the ability to get a reverse mortgage to finance your care is not necessarily a bad idea. That’s a decision that you need to make.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org