Posted on Feb. 1 2020.
Dear Clients and Friends,
Happy Valentine’s Day!
Last month’s newsletter was all about the SECURE Act, the new federal law about IRAs. I was very pleased to see more than 50 of you in attendance at my seminar to explain the act.
This month the topic is Medicaid. In my practice, in the course of doing estate planning, there are often discussions about how Medicaid planning fits in with estate planning. In fact, every complete estate plan should have a component on how to pay for long term care whether at home or in a facility.
I am often approached by clients who think it would be a good idea to transfer title of their home to one or more of their children. The thought is to protect the home or its value from being sold and used for nursing home payments.
This sounds reasonable but is usually a bad idea. Here are the reasons:
Medicaid Problem: Under Medicaid rules, your home is a “non-countable” asset. It does not have to be sold and the money used to pay the nursing home. However, if you deed the home to your children, it is considered to be a gift. If you apply for Medicaid within 5 years of the gift, then the gift is called a “divestment” and you will be penalized for doing that.
Loss of Control: If you deed the house to your children, then a lot of “bad things” (not sure that is a legal term) can happen. For example, the kids can kick you out of the house, sell it, and keep the money. Now, I know your kids would not intentionally do anything like that to you but they could cause trouble for you unintentionally. For instance, if one of them should file for bankruptcy, the court will put a lien on the home. If one of them is sued and they lose the case, then a lien for payment of the court judgement can be put on the house.
Loss of Homestead Exemption: To qualify for the homestead exemption, you must own the house and live in the house. By deeding the house, you no longer own the house so you lose the homestead exemption. Your taxes jump up.
Loss of Step-Up in Cost Basis at Death Rule: The “step-up in cost basis at death” is one of a very few good tax rules. It relates to the sale of appreciable assets such as real estate, stocks and mutual funds. When you sell such an asset, you take the sales price and subtract your cost basis, i.e., what you paid for the asset. For example, if you had a cottage you purchased at $100,000 and sold it for $175,000, then your gain would be $75,000. (For simplicity, I am ignoring repairs made to the property, cost of selling, etc.). However, if you do not sell the cottage but pass it to your children at death, then they get a step up in the cost basis to the value at the date of death, i.e., $175,000. If they sell it for $175,000, then their gain is zero. If they hold it for a while and then sell it for $200,000, then their gain is $25,000. ($200,000-$175,000=$25,000) Remember, that is the rule if you inherit property. If you deed the property to your children while you are alive, then their cost basis is the same as yours. In this example, that would be $100,000 and if the sale price was $175,000, then your children pay taxes on $75,000. Big difference.
I will be reviewing this and much more in a seminar on “What You Need to Know about Long Term Care and Medicaid”. This seminar is Thursday February 27 at the Plymouth Friendship Station. Call (734) 354-3222 (not my office) to reserve a seat and get directions.
Other seminars this month are:
February 19 Wills, Trusts and Ladybird Deeds
Novi Civic Center 6:30pm
Call (248) 347-0414
February 20 What You Need to Know about 401ks, IRAs
Westland Friendship Center 1pm
February 25 New Laws Affecting your Estate Plan
Northville Community Center 10:30am
Call (248) 305-2851
February 26 How to Review your Estate Plan
Caroline Kennedy Library 6:30pm
Call (313) 791-3800
You can find a complete schedule of seminars for the year on my website at www.gfalawfirm.com. All seminars are no charge. Feel free to bring one or more friends.
Very truly yours,