For most Americans, home is not only where the heart is, it’s where the money is as well. It’s little wonder then that a leading concern of many people seeking advice from financial professionals centers on issues of housing.
For our young clients, the issues are: How much can we afford? How soon can we buy? What’s the best kind of mortgage?
More mature clients often focus on another pressing issue: How can we protect our home and pass it or its value to the next generation regardless of whether we get sick and need expensive long-term care services?
Fortunately, there are ways for seniors to plan that may protect the value of their homes and ensure passage to the next generation, should that be a goal. Some are easy and obvious, and some a big more complicated. They all take a bit of effort. Nothing happens in life unless one makes it happen. Each requires time to complete, anywhere from a few months to five years. So the sooner one moves the better. They all involve using some combination of gifting, insurance, trusts, and family.
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 the cost of 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 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.
So how can we protect our homes? While the home, assuming the nursing home patient states an intention to return to that home, is not a countable assets and thus will not prevent the nursing home patient from receiving Medicaid. Upon the death of the nursing home resident, however, his or her home may be subject to a lien equal to the value of services they received through Medicaid. So you may not only have to remove the house from your name, but you also have to keep the house out of the reach of the estate recovery rules. This is not so simple to achieve, and any attempt to accomplish either has tax and ownership consequences that should be discussed with a qualified Medicaid planning attorney.
This column will focus on a strategy that uses a “life estate.” Property rights are typically a bundle of rights that can be split and divided, and the rights to a home are no different. If a person wants to transfer their home—removing it from their ownership—but retain the ability to live in it forever, considering a life estate strategy is a good idea.
Essentially, this strategy divides the value of a home into two parts. The use value of the right to live in the house for a number of years, demarcated by a person’s life expectancy, and the remainder value after the person has passed on. The remainder value is transferred to a person, while the owner of the house retains the life estate. For Medicaid purposes, this is considered a transfer of assets, and is therefore subject to a 60 month look back rule. As a result, the sooner one takes action the better, as in so many things financial. For Medicaid recovery purposes, many states, including Connecticut, currently limited the assets available for recovery to probate assets. That is assets that pass through the probate process. A life estate passes by operation of law (outside of probate) to the remainder beneficiary. Thus in many cases the home that is subject to a life estate will not be available for estate recovery. (Caution - federal law does authorize these states to expand their definition of available assets to include any asset in which the decedent has any interest. Several states have expanded their definition of available assets to include property subject to a life estate.)
Here’s some real numbers. An 85 year old woman with a house valued at $250,000. The value of her life estate is $43,524. The remainder value is $206,476. If she puts a life estate on the deed, she effectively transfers $206,476 of value for Medicaid purposes, while retaining the right to live in the house for the rest of her life. For estate tax purposes, the entire value of the house will be included in the woman’s estate. This means that although values over $1 million are subject to Connecticut estate tax and over $2 million are subject to federal estate tax, the house receives a step up in basis at death. For modest sized estates in which the house is the major asset, this is a great advantage.
As you can see, there are real actions middle class people can take to protect the value of the home they have spent their lives building, improving, and paying off. This requires a bit of vision, planning, time, and the use of qualified 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. The first step in all things financial is to dream big dreams and set clear goals, in this case protecting the value of the family home. Then contact a professional, explore your options and get the process started.