Keeping our homes is a prominent financial priority. This is the third and final installment in a series of articles on strategies that may protect the family home in the face of expensive long-term care services. The first, looked at creative uses of life estates. The second, long-term care insurance and family members. This column will examine the use of trusts.
First a bit of background. The average net worth of Americans ages 65 to 74 is $190,000. Nearly seven in ten own a house, the average value of which is $150,000. (Source: Federal Reserve Board, Survey of Consumer Finances, 2004)
The American dream starts at home. The threat is nursing home care. We are living longer. A married couple that celebrates each other’s 65 birthday has a 60 percent chance that one will be blowing out 90 candles on a cake. (U.S. Census Bureau) When we live this long, we often need help. And help is expensive. In Connecticut, average home care costs $25 an hour. Assisted Living is at least $3,500 a month. Nursing home care tops $300 a day. (Source: MetLife Mature Market Institute 2007)
The nursing home bill is often first paid from income, then bank accounts, then other countable assets may have to be liquidated, and finally the state, if needed. In Connecticut, the average nursing home resident is a single woman at least 85 years-old on state support. (Source: State of Connecticut Annual Nursing Facility Census, September 30, 2007) This means she has $1,600 or less to her name.
Of all the strategies discussed, transferring a home to a trust is probably the most complex to execute and cumbersome to maintain. Trusts can only be used with the assistance of a qualified attorney.
Trusts can either be revocable or irrevocable. A revocable trust will do nothing to protect the value of a home, as the trust’s contents are easily accessible. Therefore, an irrevocable trust is required. In this case, the irrevocable trust would provide the grantor with the right to remain in the house and receive any income benefits there from. This would allow the property to be included in the grantor’s gross estate and achieve the step-up in basis discussed in the life estate article while at the same time removing the property from the grantor’s probate estate and thereby avoiding estate recovery. (Caution – While under current state law many states, including Connecticut, would exclude a house held in such an income only trust from estate recovery, federal law does authorize these states to expand their definition of available assets to include any asset in which the decedent has any interest
Here’s how it works.
A grantor places the house in a trust. This is a transfer for Medicaid purposes. It may or may not be a gift for estate tax purposes, depending on how the trust is drafted. The grantor has given up control of the house, but the trust is drafted in such a way that the grantor is responsible for paying the income tax on any income generated by the trust.
The ultimate beneficiaries of the trust will be of the grantor’s choosing. In some cases, it will be rigidly established at the time the trust is established. In others, the grantors may retain a special power of appointment that allows them to change beneficiaries. The grantors can live in the house. They are responsible for its upkeep, but they no longer own it.
This strategy provides for some flexibility. The transfer will always count as a Medicaid transfer, but the estate tax outcomes are entirely up to the grantors and their qualified attorneys.
First the Medicaid transfer. Under federal law, when one applies for Medicaid assistance, the state will “look back” five years to determine if the applicant or the applicant’s spouse transferred assets to another person. If there was a transfer in this five year period, and a transfer to this trust would count, the value of that transfer would make the person ineligible for state assistance for the period of time that the monetary value of the transfer would have paid. This is marked from the date of application for Medicaid, not from the date of the transfer. It is therefore important to transfer the house to the trust at least five years before any assistance is required. In Connecticut, the average monthly cost of care penalty for 2008 is $9,464. So if a $500,000 house was transferred in the five year period preceding a need for Medicaid, it would make the person ineligible for state aid for 52 months.
Now for estate tax. If the grantors are worried about estate size and ultimate taxation, they can make the transfer a completed gift, deal with the gift tax consequences and remove the asset from the taxable estate. If estate tax is not a concern, they can keep the house in the estate and enjoy a step up in the house’s cost basis to fair market value at the time the house transfers from the trust to the beneficiary.
It’s entirely possible for a person to protect the entire value of their home even in the face of catastrophic medical or long-term care expenses. There are basically two sets of rules. One set is established by default. These are the rules that most people end up with. They require all assets to either be spent down or in some case be subject to recovery at death, including the value of the house for a single person. The other set of rules potentially allows for the protection of our houses and significant financial assets. It’s available to everyone in theory, but in practice only those who take the time to financially plan their lives actually enjoy them. They require a bit of effort, some time and working with professionals . In recent years the Medicaid laws have undergone a number of changes. Certain planning vehicles have been eliminated and most rules have been tightened. It is reasonable to expect that further changes will occur. It is vital that you speak with a local attorney with much experience in Medicaid planning.