Protecting Your Home

Nearly everyone who has worked hard through much of their lives to pay off the home mortgage, and has raised their family in that home with all the memories that brings, has a desire to leave that home to the children. That human desire is most commonly expressed as “I don’t want my home to go to the nursing home.” Here are some thoughts on that.

First, in the typical husband and wife situation, the home is an exempt asset and will not count toward the asset limits if one spouse gets sick. It is necessary to transfer that home to the healthy spouse if the other spouse needs long term care. If the one needing care can still sign, that is easy, but if not, it is critically important to have a durable power of attorney in place that authorizes “gifting” of real estate, or it may be necessary to go to probate court to have a conservator appointed, and then special permission of the court to make the transfer. This is time consuming and expensive. The answer for anyone thinking about New Year’s resolutions is to get a durable power of attorney in place that authorizes gifting to the spouse, and possibly others.

Second, if one spouse dies, and the surviving spouse becomes sick and needs long term care in a nursing home, the house is at risk. If the surviving spouse is living in the house and can stay there with long term care, the Medicaid laws allow that person to stay in the home without it counting against the $1600 limit for assets. But when that person dies, the state will have a lien against it and the home will have to be sold and the state paid back.

Given these rules, many people say “I want to give my home to my kids and play safe.” Although this can be done, and the home will be protected if five years goes by before care is needed, there are serious potential downsides to transferring the home to your children. One is that you are not eliminating risk by transferring the home to them. You are just switching the risk to them. They are less likely to need long term care because they are younger, but they have a risk of divorce, death, lawsuit or even sickness. Another very real downside to having your children own the house is that if you decide to downsize and sell your house to move to a condo or an apartment, your children may have to pay very large capital gains taxes to the federal and state governments if there is a gain on the sale. For most people the value of their home has tripled or gone up even more over the many years of ownership.

What are the better solutions? Obviously long term care insurance is one. But it is a fact that most people cannot afford or do not want to pay the annual premiums for long term care insurance. The other solution is to put the house into a specially prepared irrevocable trust that is designed to protect the home after five years, avoids the risk of your children themselves having financial or other problems, and also keeps the $250,000 exemption from capital gains tax that the IRS allows. Please note, this type of trust is irrevocable, because if a trust is revocable, it means you can take it back, and if you can take it back, the state quite logically says it is still yours. If you have done a revocable trust, the home still counts as yours, and the five year lookback to protect it under the Medicaid laws has not started to run.

The desire to protect your home is a desire that is common to almost everyone. There are better ways and riskier ways to do this, so get complete and competent guidance if you are at the point in your life where you are considering this step.