When our clients plan for the possibility that they may need long-term care in the future, they often take steps to protect their home. They do this for a variety of reasons, including the sentimental value of the home, the fact that it is their largest single asset, and the fact that it is non-liquid, making it difficult to use for other purposes.
Private insurance pays for even less. The result is that most people pay out of their own pockets for long-term care until they become eligible for MassHealth—"impoverished" under the program's guidelines.
It will help us to consider planning options to protect the home if we do so in the context of typical clients. So, allow me to introduce you to Jane and George Adams. They are in their mid-70s, retired, and in good health. They have about $400,000 in savings and retirement accounts and a house worth about the same amount with no mortgage. They have three adult children and five grandchildren. They are concerned about what will happen to themselves and the funds they would like to leave to their children should either or both of them need long-term care.
To further set the context, a few words on MassHealth eligibility are helpful. First, most nursing homes take MassHealth. MassHealth for assisted living and home care is more limited and more complicated. So we will focus on the nursing home eligibility rules, which are as follows:
(a) The nursing home resident is limited to $2,000 in countable assets. Most assets are counted against this limit, except for personal belongings, one car, a prepaid funeral, and the home as long as its equity value is below $802,000 or certain relatives are living in it.
(b) The spouse of a nursing home resident is limited to about $116,000 in countable assets. This is adjusted each year for inflation.
(c) If an applicant for MassHealth transfers assets, this will render her ineligible for coverage for up to five years (and for planning purposes we should think of this as five years). (There are some exceptions which are beyond the scope of this article.)
(d) While a MassHealth beneficiary may keep his or her home and gain coverage, MassHealth places a lien on the property in order to recover what it has spent upon the house’s sale, either during the beneficiary’s life or after her death.
(e) Finally, if either Jane or George needs nursing home care while the other is living at home, it is possible to take steps (outside the scope of this article) at that time to protect all of their assets. But this becomes much less possible if they both need care or if one passes away and the survivor needs care.
With that background, Jane and George can consider the following planning options:
1. Do Nothing
Jane and George can choose to take no planning steps. This has the advantage of leaving them with full control of the house. They can choose whether to sell it and move or whether to borrow against it to meet their living and future care costs. The disadvantage is that some or all of its value could be lost should the need long-term care in the future.
2. Gift to Children
Certainly transferring the house to their children would protect it from the potential cost of care for Jane and George, but it comes with so many risks that we would always advise clients against this step. First, it causes five years of ineligibility for benefits. If Jane and George should need care during the subsequent five years, they would have to pay out of pocket unless the children returned the house. Given their good health and other resources, they might well take this risk. The penalty period can be “cured” in the event either Jane or George needed to apply for MassHealth during the five years by the children returning the house to them, but there’s no guarantee that the children would take this step when necessary.
More importantly, a outright transfer could mean that the Jane and George would lose the roof over their heads if anything happened to their children, whether bankruptcy, a lawsuit, divorce, or a child’s premature death. The children also could decide that it’s time for Jane and George to move out before they are ready. These possibilities could be protected against to some extent by Jane and George and their children entering into a use and occupancy agreement.
Next, such a transfer would limit the ability of Jane and George to draw on the home’s equity, if they ever chose to do so.
Finally, this could have bad tax consequences for the children, causing them to pay taxes on capital gains that they would not have to pay if they inherited the home from their parents. The combination of these drawbacks and risks convinces virtually all clients not to make an outright gift of their home to their children.
3. Life Estate
A life estate is typically created by a deed from the current owner or owners of property to one or more recipients, under which the grantor or grantors retain the right to live in the property and to collect rents for the rest of their lives. At their death, the house transfers automatically to the so-called “remaindermen”—in Jane and George Adams’ case, their children. This is a relatively easy transfer to effect and solves a number of the problems with an outright gift.
First, under a life estate, Jane and George would have the right to stay in their home indefinitely no matter what happened to their children. Second, their children would be free of tax on capital gains after Jane and George pass away.
The problem with life estates is that often family members of nursing home residents are put in the awkward position of having to keep and maintain a home after the parents have moved to a nursing home in order to avoid having to spend down a portion of the proceeds if it is sold. Typically, when a house in a life estate is sold, the proceeds are divided between the life tenants and the remaindermen based on the actuarial life expectancy of the life tenants. The life tenant then has funds that are unprotected for MassHealth purposes.
In addition, capital gains are allocated along with the proceeds. While the life tenant may be able to exclude the first $250,000 of gain if the house was her residence ($500,000 if she’s married), this is not true of the remaindermen.
4. Irrevocable Trust
A solution that solves some of the problems with the life estate is an irrevocable trust. It’s great advantage over the life estate is that if the house is sold during the parents’ lives, the proceeds are entirely protected. Further advantages include the following:
The main disadvantage of a trust as compared to a life estate is that it cannot be “cured.” With a life estate, if the parent or parents need to qualify for MassHealth during the five years after the transfer, the children can convey back their interest in the property and it will be treated by MassHealth as if no transfer had ever been made, eliminating the five-year transfer penalty.
Most of our clients in Jane and George Adams’ situation choose to place their homes in irrevocable trusts. Given their health and other resources, they are willing to risk the five-year ineligibility period for MassHealth in exchange for the greater protection and flexibility offered by a trust. Those with fewer other assets or in more questionable health than Jane and George may opt for a life estate instead since it can be “cured” in the event a need for care during he subsequent five years.
In any event, anyone considering taking a step to protect assets as part of a long-term care plan needs to discuss the options with a qualified elder law attorney.
Harry S. Margolis is the managing partner of Margolis & Bloom, LLP, with offices in Boston, Norwood, and Wellesley, and the founder of ElderLawAnswers.com.