For many individuals, their home is their largest asset, and people both young and old are often emotionally attached to their homes. Parents and children have an interest in making sure that their home is not subject to creditor claims, particularly Medicaid liens, if either or both parents were to enter into a nursing home.
Protection From Medicaid Estate Recovery
In Massachusetts, Medicaid is administered by the Division of Medical Assistance ("DMA") (a/k/a "MassHealth"). Under current Massachusetts law, the state has a right to recover whatever benefits it paid for the care of the Medicaid recipient from his probate estate. MassHealth will place a lien against any assets in a Medicaid recipient's probate estate. Because the home is an exempt asset for Medicaid eligibility purposes, the only property of substantial value that a Medicaid recipient is likely to own at death is his home. If an individual owns his home solely in his name, his personal residence would be part of his probate estate and, thus, subject to attachment by MassHealth.
One solution is to have the parent transfer the home outright to his children in order to remove the home from his estate. The downside of such a transfer is that (i) the home will be subject to the children's creditors; (ii) the transfer will result in a disqualification period from Medicaid; and (iii) the children will receive their parents' tax basis in the property, so that upon a subsequent sale, the children will have to pay a large capital gains tax. The following two transfer planning techniques are a better solution to make sure that the home is not part of a parent's probate estate, and thus not subject to MassHealth placing a lien on it.
Gifting Personal Residence and Retaining a Life Estate
One technique is to have the parent transfer a remainder interest in his residence to his children while retaining a life estate for himself. The transfer of the remainder interest will result in a disqualification period from Medicaid, however, such disqualification period will typically be shorter than if the parent were to transfer the home directly to his children.
The retention of a life estate by the parent will allow his children to receive a "step up" in tax basis to the fair market value of the property at his death for income tax purposes. As a result, upon the subsequent sale of the property by the children, they will have to pay only the capital gains taxes, if any, on any increase in property value from the date of the parent's death. Furthermore, the children cannot evict the parents or sell the home during the parent's lifetime without the parent's consent.
Gifting Personal Residence and Retaining a Limited Power of Appointment
A parent could also consider gifting his personal residence to his children while retaining a "special limited power of appointment." This technique ensures that his children receive a "stepped up" tax basis in the real estate, and it also enables the parent to direct the ultimate disposition of the property. This special power makes the gift incomplete for gift tax purposes and results in the property being includible in his estate. The gift, however, is complete, under state law, for Medicaid purposes.
From an asset protection standpoint, this method is effective to shield the house from the children's creditors since the children will not have a vested interest. As such, if one of the children were having a creditor problem, the parent could exercise the power of appointment and appoint the interest to another child.
In summary, any transfer of a personal residence for Medicaid planning purposes should be examined from an estate, gift and income tax perspective.