Giving assets away during one’s lifetime is usually done for two reasons. The first is to reduce the value of one’s estate to avoid estate taxes at death. The second is to protect assets in the event one needs long-term care covered by Medicaid.
The 2021 federal estate tax exemption is $11.7 million. This means an individual can gift up to the $11.7 million during their lifetime or after death without incurring a federal estate tax. Married couples can gift $23.4 million together, and the surviving spouse can use any unused portion of the first spouse’s federal exemption. However, the federal exemption is set to sunset on or before January 1, 2026 and revert to $5 million, adjusted for inflation. In New York, the exemption is currently $5.93 million. Because the average person does not fall within the estate tax threshold, a review of your parents’ assets, including the value of their home, would help determine if any estate tax planning is required.
The New York Medicaid program pays for the cost of long-term care at home or in a nursing facility so long as the applicant is medically qualified and financially eligible. An applicant can have no more than $15,900 in their name, not counting tax deferred retirement accounts. For homecare Medicaid, a primary residence is considered an exempt asset so long as its equity value is no more than $906,000. However, if an applicant dies with a residence in their sole name, Medicaid can put a lien on the property after death. For nursing home Medicaid, a primary residence is not an exempt asset, unless a spouse is living in it, and is therefore immediately subject to a lien once Medicaid is approved.
To protect your parents’ home from a Medicaid lien, the property needs to be transferred out of their name, either to a trust or to a third-party. Nursing home Medicaid has a five-year lookback on transfers. This means that a penalty period will be assessed for any assets transferred for less than fair market value within five years prior to the submission of a Medicaid application. There are also pending changes to homecare Medicaid where a 30-month lookback is to be implemented on all transfers. It is therefore important to start the clock on the lookback period in order to fully protect the home during your parents’ lifetime and after death.
While it is true that a lookback applies whether or not assets are transferred directly to you or to a trust, there are important consequences to consider when transferring an asset outright. For example, if your parents bought their home for $100,000 and it is now worth $900,000, if you sell the property during your lifetime, you will owe capital gains taxes on the $800,000 increase. Essentially losing your parents’ $500,000 capital gains tax exemption that they would have otherwise received if they sold the property as owners. Moreover, an outright transfer is vulnerable to your creditors and spouse in case of divorce or your death.
Alternatively, transferring the house to a Medicaid asset protection trust protects the asset for Medicaid purposes, while also shielding the home from your creditors and allowing your parents to retain their rights in the home. Your parents will still be entitled to the exclusive use and occupancy of the home and maintain all tax benefits afforded to them. Additionally, when your parents pass the property to you at their death, the property will receive a full step-up in cost basis to the date of death value. Accordingly, if you were to sell the property after you inherited it, there will be little to no capital gains tax – as long as the law stays the same. Finally, placing the property in trust now will start the lookback on the transfer and keep it protected from a Medicaid lien.
Because navigating the ins and outs of taxes and Medicaid planning can be a complicated task, it is best to consult an Estate Planning and Elder Law attorney to learn more about what kind of planning best suits your parents’ needs. This is especially true in 2021 in light of the tax and estate proposals to reduce the estate tax exemption and eliminate step up in basis at death.