3 Ways To Protect Your House From Medicaid: Gift, Life Estate, Medicaid Trust

foreign [Music] the process of trying to protect your house from either a long-term Caravan or a Medicaid spend down process there's essentially three asset protection strategies that you may be able to employ the first is you could gift your house outright to your children the second is you could gift your house to your children but have a life estate and the third is you could set up a Medicaid trust and gift your house to the trust and today we're going to be going over the pros and cons of each of those options the reason why we're covering this today is this is becoming more of a common strategy people are living longer they're needing care later on in life in these Long-Term Care events are popping up more frequently in a lot of cases people have already had personal experiences with this with their parents with their friends and they've seen them they go through that painful process of spending through all their assets liens being placed against the primary residence and they're trying to avoid that for themselves all of these strategies we're going to be reviewing today have to be employed well in advance of the the long-term care event taking place a lot of states in Medicaid have what's called these look back provisions and they vary state by state like New York has a five-year look back period which says if you gifted anything a house stocks any type of assets to your children or a trust if it was gifted away within the last five years of you applying for Medicaid those assets have to come back on the table and then are subject to spend down in this video we're going to more specifically focus on protecting the primary residents which in most cases is what's called an excludable asset for purposes of Medicaid which means they can't force you to spend it down or sell your house while you're still alive you can qualify for Medicaid without that the problem becomes is Medicaid can potentially place a lien against your house well they can't force you to sell it they can put a lien against your property which could say hey we're going to tally up all the money that Medicaid's paying for you and then when you pass and that Homestead Expo buyers that's when they can make your beneficiaries sell the house and they want to recoup the money that they paid on your behalf so instead of your house going to your kids it ends up going to Medicaid now let's look at option number one which is gifting your house outright to your children so you just change the deed over your kids you get the house completely out of your name which starts that five year look back clock and if you make it past five years and you have a long-term Caravan that is no longer subject to that Medicaid lien because essentially you don't own the property anymore now while that could be an effective strategy to protect the primary residents from these Medicaid liens it creates a whole host of other tax issues that we're going to talk about tax issue number one is if you decide to sell your house while you're still alive at some point in the future so the way the tax rules work is if you own the house and it's still your primary residence there's something called a primary residence tax gain exclusion which says if you're a single Filer and you sell your primary it protects up to 250 000 worth of gain from taxation if you're married filing joint it's a 500 000 gain protection but if you sell your house at a game you no longer own your house your kids own your house and it is not their primary residence so if you sell the house and there's a gain built up in your house your kids would have to pay tax on that event but even if you never intend to sell your house and the kids are going to inherit the house there is still a tax issue that sits out there with gifting the house to your kids and it has to do with the gifting tax rules when you give someone an asset they receive your cost basis and the property which means if you bought your house 30 years ago for a hundred thousand dollars and you gifted to your kids their cost basis is now a hundred thousand dollars which means after you pass away if the house is now worth five hundred thousand dollars there's a four hundred thousand dollar gain that if your kids sell the house they're gonna have to pay tax on that just so you know the dollar amounts we're talking about if we're talking about a four hundred thousand dollar gain a long term capital gain to your beneficiaries and a flat 15 percent Fed rate that's sixty thousand dollars in federal tax due before we even get to the state stuff outside of just the tax issues there's also a control issue associated with gifting the house to your children they have full control which means they could just decide to sell your house and there's nothing you can do to stop them in order to resolve some of these tax and control issues we're going to graduate to option number two which is gifting your house to your kids but retaining a life estate in the property and what a life estate is it basically reserves your right to live in that house they cannot sell your house as long as you are still alive you also have similar Medicaid protections because you made a gift to your children you've essentially moved that house out of your name and you can start that look back period for purposes of the Medicaid spend down the big tax issue that the life estate solves that was not there when you just gifted the how house I'll write to your kids with no life estate is this step up and cost basis when you pass away so remember in the previous example you gifted the house to your kids and they had to pay tax in the full gain with a life estate your beneficiaries get what's called a step up and cost basis which means when you pass away their cost basis steps up to the fair market value of that house when you pass of the House of worth 500 000 when you passed away their cost basis steps up to 500 000 which means they can sell the house the next day and they don't owe any tax on it the other advantage of going the life estate route is a relatively low cost for executing this strategy it's still just a deed change but instead of just signing the deed just to your kids you're signing it to your kids with a life estate attached to it versus having to set up let's say a Medicaid trust which we're going to cover later on which you'd have to retain a trusted estate attorney and pay the fees to set up the trust however there are a number of disadvantages that I want you to be aware of when gifting your house or the life estate and the first one is control now while it solved the control issue of your kids being able to sell your house where you're live that's taken care of the problem is if you ever wanted to sell your house while you're still alive because if you want to sell your house anyone who has a life estate in your house has to okay it which means if it's you and three of your children and you gifted your house to your three children with a life estate if one of your kids disagrees with you being able to sell your house you can't sell it while the life Estates solved the Step Up in cost basis issue that we discussed it does not solve the tax issue if you decide to sell your primary residence while you're still alive because your kids are technically the owner of your house you still lose that primary gain exclusion which was at 250 000 for single filers 500 000 for married filing joints so if you do end up selling your house your children could still have a tax event the one thing that is slightly different is your life estate actually is assigned a value so because you have have this ability to reserve the right to live in the house the IRS assigns a value to that life the state based on their life expectancy table so an example you sell your house for 500 000 while you're still alive they may say hey 50 000 at 500 000 is the value of the life estate that goes back to you and the other 450 000 goes to your kids the fact that you may get cash back if you were to ever sell your house due to the value of your life estate creates a whole new gift baskets of issues with the Medicaid spend down process because if let's say you or your spouse are receiving Medicaid and all of a sudden you sell the house and your life estate's worth a hundred grand and that cash comes back on the table that could immediately disqualify you from receiving those Medicaid benefits because your assets are over the Medicaid allowance or even if you're not getting Medicaid benefits that money comes back on the table which could be subject to a new look back period unfortunately another disadvantage of Life Estates is your children's financial problems can all of a sudden become your more financial problems because again you gifted your house to them now it is now their asset so they are faced with a lawsuit a tax lien they get a divorce that is technically their asset that could be subject to their liabilities also if one of your children were to ever pre-decease you and pass away before you you run the risk that their ownership in the house would then have to pass through probate and their estate and then their beneficiaries which could be children spouse someone else could all of a sudden be a part owner in your house which was never the original intention now we're going to talk about option number three which is setting up a Medicaid trust and then gifting your primary residence of the trust which does resolve a lot of the issues that we talked about with the life estate let's look at the advantages first so number one is control similar to the life estate you can put language in your trust document that says your trustee which could be one or more of your kids are not allowed to sell your house as long as you're still alive you also receive the Medicaid protection because if you set up a trust and gift your house to that trust it has essentially been moved out of your name it would no longer be subject to those Medicaid liens that we talked about earlier similar to the life estate the Medicaid trust also resolves that step up in cost basis issue which means when you pass away if it's a Medicaid irrevocable grantor trust those assets receive a step up in basis and your kids can sell them the next day with no tax liability the major tax advantage that the Medicaid trust has over the life estate the outright gift is you get to retain your primary residence gain exclusion if you were to ever sell your house at any point in the future as long as your trust is what's called a grantor trust so you put your house in a trust let's say you're married filing joint and 15 years later you decide to sell your house for a 400 000 gain you would be protected by that half a million dollar gain exclusion if you have multiple children there could also be more control if you decide to sell your house down the road mainly because like I mentioned before with life estate if all of your kids have a life estate all of them have to agree to selling your house with a trust you could designate one or more of your children as trustees but if you designate just one of your children as trustee they are the only ones that have to approve the sale that house versus running around to all of your beneficiaries of trust to get their approval the Medicaid trust also resolves that issue of your children's financial problems becoming your financial problems because they don't totally own your house yet your trust owns your house and the kids are usually just beneficiaries which means if they have financial problems that arise nothing can be attached to it because it's not their asset the trust also resolves the issue that if you ever sell your house and you receive cash as long as that money stays within the trust it does not jeopardize Medicaid benefits or start another five-year look back period so if your house is owned by your Medicaid trust you sell it at the closing they'll make the check payable to your trust you can deposit that to a checking account and the name of that trust and then it can buy your next house or if you're not buying another house you can set up let's say an investment account in the name of the trust and just invest the assets but it never left the trust the final advantage of these Medicaid trusts is a trust can own assets other than just your house while it can be used just to protect your primary residence which plenty of people do that if you have let's say savings accounts Vehicles investment accounts like trust can own those assets as well and start that five-year look back period if you do not need access to them the only asset that a trust really can't own is a retirement account like an IRA or 401K when we compare all three options gifting the house to your kids outright gifting the house to your kids with a life estate or setting up a Medicaid trust then gifting your house to your Medicaid trust then Medicaid trust tends to give you the most control flexibility tax efficiency so then you would say well why doesn't everyone use a Medicaid trust again some people are scared Away by the cost that's needed to set up the trust because you usually have to retain a trust in the state attorney to draft your trust document which could range anywhere from 50 hundred dollars maybe up to five or six thousand dollars depending on the attorney you use and the complexity of your trust but when you look at all the advantages and tax advantages it may be worth the two or three thousand dollars it cost to set up the trust to maintain all of those benefits I hope this was helpful if you have any questions please feel free to reach out to me at moneysmartboard.com thank you foreign [Music]

Channel: Michael Ruger - Greenbush Financial Group

Views: 8,614

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Id: bsNQwml5ZqQ

Length: 12min 50sec (770 seconds)

Published: Wed Apr 26 2023