The Family Home

The family home is not only where years of precious memories reside, and for many people it is their most valuable asset. It’s natural for parents to want to pass on that home, or its value, to their children or grandchildren. In most cases, that can be done with appropriate planning at the appropriate age, which is when people get up in years and have an increased risk of long term care. The following information outlines what the rules are and how they can protect that home, and other assets as well.

If long term care is needed, at home or in a nursing home, the Medicaid rules allow the sick spouse to transfer the home to the healthy one at any time, including at the time care is needed, without any restriction or penalty for making the transfer. There is no five year wait for transfers to a spouse. But what if that sick spouse is unable to sign? That is why a durable power of attorney must be in place beforehand that gives specific authority to gift the real estate to the spouse. Without that specific authority, it would be necessary to go to probate court to get an order authorizing the transfer. That takes time and money, and if home care is costing thousands each month, that money is lost also.

Now let’s assume one spouse dies, and the surviving spouse later needs long term care. The law allows a transfer to a disabled child, but that is a rare situation. One answer for an elderly couple is to do special wills that send the house into a trust inside the will, called a testamentary trust that will substantially, but not totally, protect the house. This can also be done for other assets should the surviving spouse need long term care.

Many people think of transferring their house to their children, and running the five year clock to get it protected. That might work, but the risks are substantial. Although your children or their spouses are far less likely to need long term care while you are alive, they have risks of divorce, lawsuits and even sickness or death. In addition, if you decide to downsize or move nearer to a child or go south, your kids will have to pay a substantial capital gains tax because they do not live in your house. You and your spouse will most likely not have to pay capital gains tax because each of you has a $250,000 exemption on the sale of your house. If you bought your house for $150,000 and each of you has a $250,000 exemption for a total of $500,000, a total of $650,000 is exempt from tax. With the recent increase in house values, avoiding capital gains tax is always something to keep in mind.

You could buy long term care insurance, but the premiums are not affordable for a huge percentage of people. One solution is to put the family house into an irrevocable trust that will protect the home after five years, and that has tax clauses that treat you as the homeowner for tax purposes, so that no capital gains is due or up to $500,000 of gains and 100% of the house is protected under Medicaid rules, even if both spouses become sick and need long term care. Revocable trusts do not protect the house under the Medicaid rules because they do not start the five year lookback. That is because with a revocable trust, you can revoke it and take the home back. In the eyes of the state, it is still yours.

In summary, planning for the costs of long term care depends on the family situation, the size and the kind of assets, and the Medicaid rules in place at the time you need care. Get competent and thorough advice when it comes time to plan to protect assets, especially your home.