Securing Your Family Home

Almost all families work hard through much of their lives to pay off their home mortgage, and have raised their families in that home. Most have a desire to leave that home to the children or at least have the children receive the value of it. They fear losing it to pay for long term care. Often that human desire is stated as “I don’t want my home to go to the nursing home.” There are several rules that are designed to protect the home, and in many cases, it is possible to save that value for the family.

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 allowed to transfer that home to the healthy spouse if the other spouse needs long term care, even at the last minute, if the one needing care can still sign. If not, it is critically important to have a durable power of attorney in place beforehand 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 planning ahead is to get a durable power of attorney in place that authorizes gifting to your spouse, and possibly others.

Second, when the first spouse dies, and the surviving spouse later 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 asset limit. But when that surviving spouse dies, the state will have a claim against it to pay the state 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. In general, it is not a wise thing to do. First, you are not eliminating risk by transferring the home to them. You are just switching 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. Then your home is an asset that their creditors could go after. Another very real downside to having your children own the house is that if you decide to downsize and sell your house, 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. A husband and wife who live in their house, each have a $250,000 exemption from capital gains tax if it is sold during their lifetime. The children don’t get that exemption is they don’t live there.

What are safer solutions? Obviously long term care insurance is one. But because of the cost, most people cannot afford or do not want to pay the annual premiums. Another 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 if your children themselves have 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 an revocable trust, the home still counts as yours, and the five year lookback to protect it under the Medicaid laws will not start to run. In short, revocable trusts do not protect property from the Medicaid eligibility rules.

The desire to protect your home is a strong 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.

Attorney Stephen O. Allaire is Of Counsel and Attorney Halley C. Allaire is principal in the law firm of Allaire Elder Law, members of the National Academy of Elder Law Attorneys, Inc., with offices at 271 Farmington Avenue, Bristol, (860) 259-1500, or on the web at www.allaireelderlaw.com. If you have a question, send a written note to either attorney at Allaire Elder Law, LLC, 271 Farmington Avenue, Bristol, CT 06010, and they may use your question in a future column.